American authorities want Canadian financial institutions to give up more data—and more detailed data—to the Internal Revenue Service (IRS). The tax treaty currently in place between the two nations already requires some sharing of financial information on individuals and corporations. When the U.S. Foreign Account Tax Compliance Act (FATCA) comes into effect in July 2014, there will be a lot more—some would say too much—sharing. FATCA will affect all financial institutions: credit unions, insurance companies, investment and mutual fund dealers, and so on.

“The clear impetus was the UBS scandal involving thousands of offshore bank accounts held in Switzerland by Americans,” said Allison Christians, professor of law at McGill University. FATCA is the third attempt at a stand-alone bill. And Christians points out that it has “stirred a sleeping giant: the U.S. practice of imposing taxation based on nationality status alone.” Prior to FATCA, Christians noted, the U.S. was not overtly forcing foreign governments and entities to assist this taxation scheme.

“The U.S. is the only country in the world other than Eritrea that levies taxes based on citizenship rather than residency,” said Marion Wrobel, vice-president of policy and operations at the Canadian Bankers Association (CBA). The CBA has been opposed to FATCA from the beginning, he said, as have financial institutions and their associations and governments around the world.

Under U.S. tax law, the scope of persons who must file U.S. returns is very broad. In addition to U.S. citizens, Canadians with “U.S. status,” such as permanent resident (“green card”) status, may be required to file U.S. tax returns. “Sometimes a client does not even realize he or she has a U.S. tax filing requirement,” said Christine Perry, citing as an example a person born outside the U.S. whose mother is a U.S. citizen. Perry, a lawyer at Keel Cottrelle LLP, specializing in cross-border tax and estate planning solutions for high net worth individuals, gave a CFA Society Toronto seminar in October 2013 on issues facing U.S. clients.

Citizenship can be a complicated matter, said Perry, noting that a client may think he or she has renounced citizenship but may still be characterized by the IRS as a U.S. citizen. It is not enough to commit an expatriating act such as taking an oath of allegiance to a foreign country. An individual must also show that they performed the act knowingly and with the intention of relinquishing their U.S. citizenship. Generally, a person must now appear in person at a U.S. embassy or consulate in a foreign country and sign an oath of renunciation.

Currently, Canadian financial institutions provide information to Canadian regulators to check for such things as money-laundering activity, but they do not provide information directly to any U.S. agency, such as the IRS. The new law will mean that every individual with a financial account in Canada over a minimum threshold must be scrutinized for U.S. indicia. Under FATCA, Christians said, the U.S. indicia will include not only the client’s address but also their phone number, post office box, power of attorney, standing order of money transfer, and the “big one”—U.S. birthplace.

The CBA supports the intergovernmental agreement (IGA) that the Canadian government is currently negotiating with the U.S. government as the best possible solution to FATCA, said Wrobel. Extrapolating from agreements that the U.S. has signed with other governments, the IGA would mean that Canadian financial institutions would report tax information on persons with U.S. tax status to the Canada Revenue Agency, which would then pass it on to the IRS, rather than require Canadian financial institutions to report the information directly to the IRS., Wrobel explained.

Highlighting a paradigm shift in the new tax law, Wrobel contrasted the current tax treaty, which is focused on income information, with FATCA, which is focused on both income and the assets generating that income. Such a tally requires monitoring account balances and transfers into and out of accounts. “This is about constant surveillance of financial activity by anyone who has U.S. indicia,” said Christians.

Besides the expected increase in compliance costs and the risk of penalty from U.S. authorities, Christians said, there may also be increased litigation risk “with respect to customers who are mistakenly identified as having U.S. indicia, or whose accounts are closed, or who are asked for additional personal information that is not required by law.”

The increased regulatory costs mean increased business costs for financial institutions. Affected clients must bear the direct costs of paying for specialized advice on tax compliance and penalties, should they fail to comply. The demand for more detailed financial records will increase data security risks (such as fraud or human error) when large blocks of information such as social security numbers, account numbers, amounts, and other personal information are shipped to other agencies.

“Under urging from FATCA’s proponents, the information gathered from Canadian institutions could be designated as non-tax return information, which would allow it to be freely shared with other agencies, including the National Security Agency and border and immigration control, thus compounding the data security risk,” Christians noted. To make matters worse, there is currently no remedy for error. Citing a lack of review mechanisms, she said, “I am not sure how a person manages a case of mis-characterization.”

The IGA negotiated between the U.S. and a number of other countries commits both parties to respect taxpayer confidentiality and privacy.

Given the impending changes, what can individuals and individual firms do?

Wrobel refers concerned citizens and financial institutions to the CBA website for more information, and adds that persons who may have U.S. tax status “should talk to their tax advisor.” Christians takes a larger view, suggesting that individuals should contact Canadian MPs and U.S. members of congress to share their stories and to raise questions about FATCA’s underlying philosophy, such as “why the U.S. expects all of its citizens who live abroad to account for their assets and fulfill onerous filing requirements regardless of whether they ever have any tax liability to the U.S.”

On the practical side, Perry said that Canadian financial institutions will be conducting a thorough due diligence on all individual accounts, emphasizing that accounts over $1 million require both paper and electronic searches, as well as queries with the relationship manager. Regarding her clients, Perry said, “I’m encouraging everyone to become compliant during the period of leniency.”