FATCA – The Long Arm of the IRS
If you are a U.S. citizen living in Canada, you will no longer be able to outrun the long arm of the IRS. It has long been the case that the U.S. requires its citizens, no matter where they live in the world, to file annual U.S. income tax returns and report worldwide income to the IRS. Until now, it has been difficult to enforce this law due to lack of information.
The reality, as of July 1st 2014, is that for U.S. citizens and green card holders in Canada, you can’t put this off any longer because the IRS now has a way to catch you. The Foreign Account Tax Compliance Act has arrived. FATCA requires non-U.S. financial institutions to provide information to the IRS about bank accounts, investment accounts, mutual funds and any other financial accounts held by “U.S. persons” living abroad.
Does FATCA impact you?
To determine if this impacts you directly, the first question to ask is: am I a U.S. person? A U.S. person is defined as a citizen, a U.S. green card holder or someone who meets the Substantial Presence Test because of the number of days spent in the U.S. This last one is tricky. So if you are not sure and you spend significant time in the U.S. traveling or for work, seek the advice of an accountant.
In order to cooperate with the U.S., and also to ensure that financial institutions would not be forced to withhold 30% tax on U.S. investment income, Canada signed an Intergovernmental Agreement (IGA) with the U.S. This agreement requires the Canada Revenue Agency (CRA) to inform the IRS about the financial accounts of U.S. persons in Canada. To implement the IGA, Canada has amended its domestic tax law to require financial institutions to report the following information about qualifying accounts of U.S. persons that are greater than $50,000:
- Name, address and U.S. tax payer identification number,
- Account numbers,
- Account balances or values,
- In the case of a custodial account, like Nexus accounts, the total gross income and total gross proceeds from the sale or redemption of the investments, and
- For depository accounts, like a savings account, the total gross interest paid must be reported.
At the end of the day, this means more compliance and even more forms to open up accounts at financial institutions and custodians. The first job for all financial institutions and custodians will be to determine if existing and new clients have any U.S. connections. Expect to be asked about your U.S. tax status whether you are a U.S. person or not. You will likely be asked to sign off on IRS forms – typically a W-9 or a W-8Ben. If you are a U.S. person, then you may need to provide your U.S. passport. We (Nexus), together with our custodian (RBC IS), have a responsibility to collect information about citizenship for new clients and we also need to go through existing records and determine if clients are U.S. persons and then report this information to the CRA.
The good news is that under the Canadian IGA, the CRA doesn’t have to report to the IRS on RRSPs, RRIFs, RESPs and TFSAs. But be warned, if you are a U.S person, just because the CRA isn’t reporting this information to the IRS you are still required to report and pay tax on RESPs and TFSA accounts and you must make special elections to defer income on registered accounts.
Why U.S. Persons Should File
If you are a U.S. person you should make sure you are fully compliant with U.S. tax filing requirements. Otherwise it could cost you more than you think when it comes to interest and penalties. The U.S. currently has two programs for those U.S. persons abroad who have failed to file. The first is the Offshore Voluntary Disclosure Program. This program is aimed at people who hide cash in offshore tax havens to avoid dealing with the IRS. This program includes punitive penalties on foreign assets of up to 50% (up from 27.5%) of the highest aggregate balance of foreign accounts not previously disclosed. The second program is something called the Streamlined Foreign Offshore Program. This program is aimed at Americans who have lived outside of the U.S. for years and are not purposefully trying to hide cash. You are required to file the last three years of delinquent returns, six years of FBARs and complete a non-filer questionnaire. The full amount of tax owing and interest due must be paid when you file the returns. In order to qualify for this program, your failure to file must be due to non-willful conduct – negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
If this affects you, it is important to address this sooner rather than later because you might find that you owe U.S. tax beyond what is usually offset by foreign tax credits. The new 3.8% Medicare surtax on net investment income is one example where tax is now owing to the IRS and not offset by taxes paid in Canada.
For many Nexus clients, FATCA and the IGA mean more information will need to be collected, regardless of whether you are a U.S. person or not. Between 2014 and 2016 financial institutions and custodians will be busy collecting information and identifying U.S. reportable accounts. Starting in 2015 information will go to the CRA and then automatically be reported to the IRS. You can no longer outrun the long arm of the IRS.
