What is FATCA?
The United States enacted the Foreign Account Tax Compliance Act (FATCA) in March of 2010. Under FATCA, non-US financial institutions would be required to report certain account information to the IRS for any U.S taxpayers. Failure to comply with these requirements would result in certain sanctions being placed on the financial institution as well as sanctions on the account holders, including an additional 30% U.S. withholding tax on any payments from the U.S.
Why did Canada sign the FATCA Agreement?
If Canada did not have an agreement in place and if they had not negotiated and signed a FATCA agreement, the obligations under FATCA would have automatically been imposed to the full degree. As a result, Canada engaged in lengthy negotiations and was able to negotiate exemptions to FATCA to reduce the amount of information that is required to be provided as well as negotiate exemptions for certain types of accounts, such as registered retirement savings plans (RRSP), registered retirement income funds (RRIF), tax- free savings accounts (TFSA), Registered Disability Savings Plans (RDSP) as well as others. As well certain financial institutions with less than 175 million in deposits would be exempt (such as certain credit unions).
What information will be sent to the IRS and isn’t this an invasion of privacy?
Canadian financial institutions will be required to provide information on certain accounts held by US citizens and US residents (including dual Canadian/ US citizens living in Canada). However, under the agreement, the financial institutions will not send any information to the IRS directly, but rather will send this information to the Canada Revenue Agency. From there, the provisions of the Canada-US Income tax convention will lay out the basis for the exchange of information with the IRS. According to the Canadian finance departments website, this is consistent with the privacy laws in Canada.
What does this mean for US citizens living abroad?
Essentially, this opens another avenue in which the IRS will be able to identify U.S. taxpayers living abroad who are not tax compliant as well as identify potential tax evasion. Through this agreement, many U.S. citizens globally will now be informed from their financial institution that the financial institution is now required to provide information about their accounts to the IRS. This in turn, gives U.S. citizens, who may not have been aware that although they were not living in the U.S., that as a U.S. citizen, they are still required to file US tax returns as well as any other compliance documents, including FBAR’s (Foreign Bank Account Reporting for Form 114).
Currently, there is a Streamline Program which allows non-compliant US tax payers to become compliant. For taxpayers who have been living outside of the U.S, this usually requires the last 3 years of tax returns and 6 years of FBAR’s to be filed. Apart from interest that may be charged on any outstanding tax balance owing, generally no other applicable penalties will be issued (such as the exorbitant FBAR late/ failure to file penalties)
Do you have other questions or comments about FATCA or becoming compliant with your US tax filing requirements? Give us a call, send us an email or comment below and we would be happy to answer your questions.