09/16/2011 04:57 EDT | Updated 11/16/2011 05:12 EST

Jim Flaherty Says U.S. Plan Would Turn Canadian Banks Into 'Extensions Of The IRS'


OTTAWA - Canada is accusing the United States of sowing distress and fear among dual citizens who have innocently failed to file a U.S. return when they owe no taxes.

In a letter to of three leading U.S. newspapers, Finance Minister Jim Flaherty tells the U.S. Internal Revenue Service to back off in their efforts to find offshore tax cheats in Canada.

"Canada is not a tax haven. People do not flock to Canada to avoid paying taxes," he wrote to the New York Times, Wall Street Journal and Washington Post. The letter was also released to some news outlets in Ottawa by the minister's office.

"Most of these Canadian citizens, many with only distant links to the United States, have a very limited knowledge of their tax reporting obligations to the United States.

"These people are not high rollers with offshore bank accounts. These are people who have made innocent errors of omission."

The U.S. is one of the few countries that compels its citizens to file a U.S. return even if they are living abroad and paying taxes abroad. The law applies also to citizens of another country if they have not renounced their U.S. citizenship.

As well, the U.S. has proposed a new law that would compel Canadian banks to notify the IRS of accounts held by clients with dual citizenship, in effect turning the banks into "extensions of the IRS," according to Flaherty.

Dual citizens in Canada complain they have been trapped them in a no-win situation. If they report now, having failed to do so in the past, they could be liable to retroactive penalties and fines.

"The threat of prohibitive fines for simply failing to file a return they were unaware they had to file, is a frightening prospect that is causing unnecessary stress and fear among law-abiding, hard-working dual citizens," Flaherty said.

There are an estimated one million dual citizens living in Canada.

Flaherty writes that while he understands the U.S. interest in tracking down tax cheats, he points out there is an established avenue under which such issues are handled through the Canada-U.S. "Bilateral Tax Information Exchange Agreement."

"To rigidly impose (new requirements) on our citizens and financial institutions would not accomplish anything except waste resources on all sides," Flaherty said.

America Votes
The latest polls, breaking news and analysis on the U.S. election from HuffPost’s Washington, D.C. bureau