A new American tax law will come into effect in July that could impact Canadians, even those with no ties to the U.S.

The Foreign Account Tax Compliance Act will require all financial institutions around the world to identify and hand over the financial information of anyone considered to be a U.S. person to the IRS.

As banks and other financial institutions face higher costs to implement the new rules, experts say all customers will likely face higher banking fees and charges.

Here's a summary on what the law is and what it means for Canadians:

What is FATCA?

FATCA became U.S. law in March 2010, but will take effect around the world on July 1, 2014.

The goal of the law is to find offshore accounts held by U.S. taxpayers seeking to avoid paying taxes on them, according to Allison Christians, the H. Heward Stikeman Chair in Tax Law at McGill University. 

"The way the U.S. law is written, financial institutions around the world have an obligation to ensure that any accounts that are held by American people with U.S. status, that information about that account is given to IRS," Christians told CTV's Canada AM on Tuesday.

Who is considered a 'U.S. person' for tax purposes?

The U.S. is one of two countries in the world that taxes people based on citizenship instead of residence.

"In Canada we consider Canadian residents as people who are here in Canada, who take advantage of the services our government offers us," Christians said.

A U.S. person is considered:

  • A citizen of the U.S. (including an individual who was born in the U.S. but lives in another country and has not renounced their U.S. citizenship.)
  • A lawful resident of the U.S. (including a U.S. green card holder)
  • A person residing in the U.S.
  • Certain individuals who spend a significant number of days in the U.S. each year

"Those people are treated as if they're in fact living in the U.S. no matter where they are," Christians said.

Who will be affected by FATCA?

FATCA could potentially impact almost every Canadian, as even those not considered "U.S. persons" may feel the financial pinch of the new law.

Christians says financial institutions will face high costs to implement the reporting system, and those costs are typically passed on to clients in the form of higher fees and charges.

How will FATCA be enforced?

The penalty for financial institutions and customers who don't comply with the new law includes a 30 per cent withholding tax on all U.S. income flowing to the bank, and a 30 per cent withholding tax on sale of U.S. securities.

What's Canada's response?

The Canadian Banking Association has raised its concerns with the IRS and the U.S. Treasury Department over the changes.

Canada, along with other countries, is also negotiating intergovernmental agreements with the U.S. that will set out alternative requirements for their financial institutions.

"The U.S. understands it's difficult to enforce this program, especially given that it interferes with the sovereign laws of other countries," Christians said. "The U.S. is scrambling to come up with agreements to try and overcome this."