Since July 1, 2014, Canadian financial institutions have been identifying and gathering information on U.S. persons who hold accounts at their institutions. This process is part of the Foreign Account Tax Compliance Act (FATCA) that was passed in the U.S. in 2010.
What is FATCA?
FATCA was created in order to detect U.S. persons who are evading U.S. tax by holding funds in financial accounts outside the U.S.
FATCA requires non-U.S. financial institutions to report relevant information on U.S. persons to the IRS. If the financial institutions do not comply with FATCA, they face a 30 per cent withholding tax on any U.S. source payments paid to the financial institution or its clients.
What is the intergovernmental agreement?
In 2014, the Canadian government entered into an intergovernmental agreement (IGA) with the U.S. Under this agreement, if a U.S. person has an account at a Canadian financial institution, that Canadian financial institution is now required to report the relevant information on the account held by the U.S. person to the Canada Revenue Agency (CRA). The CRA will then provide this information to the IRS.
What is a U.S. person?
Generally, a U.S. person is:
- a U.S. citizen (individuals born in the U.S., but who are resident of Canada or another country, and have not renounced their U.S. citizenship are still considered U.S. persons);
- a U.S. resident (including U.S. green card holders);
- S. corporations, trusts and partnerships may also be considered U.S. persons.
- an individual who spends considerable amounts of time in the U.S. may be considered a U.S. person.
All U.S. persons generally have filling obligations with the IRS, so it is important to consult with a qualified professional if you believe you may be considered a U.S. person.
How does FATCA and the IGA affect U.S. persons living in Canada?
The exchange of information established by FACTA and the IGA should concern U.S. persons living in Canada. This is because a U.S. person living in Canada is required to file annual tax returns with the IRS reporting their worldwide income. However, unless you have U.S. source income, a U.S. person living in Canada generally does not end up owing any tax to the U.S. It is the significant fines and penalties on the other forms that they may be required to file that are of the most concern.
Now that the Canadian financial institutions will essentially be identifying U.S. persons living in Canada for the IRS, it is only a matter of time before the IRS starts to identify and contact U.S. persons who are not compliant with their U.S. tax filing obligations.
Below is an example to help explain the potential consequences:
Jennifer is a U.S. citizen by birth, but moved to Canada when she was five years old. She has lived in Canada ever since, and only visited the U.S. for brief holidays. She has never filed a U.S. tax return.
Jennifer earns a salary from her Canadian employer of $80,000 per year. Her only financial accounts are held at one of the major Canadian banks, and consist of a savings account that fluctuates from $0 – $5,000 during the year as well as a non-registered investment account with an approximate balance of $100,000.
Since Jennifer is a U.S. person, her Canadian bank is now required under FACTA and the IGA to report the information on her financial accounts to the CRA, who will then provide this information to the IRS.
Prior to FACTA, the only information that the IRS would have about Jennifer would most likely be her Social Security Number. The IRS would probably not know where she currently lives, her income, her financial assets, etc.
If Jennifer does not become compliant, she will expose herself to potentially significant fines and penalties from the IRS if they use the information they receive from FATCA and the IGA to identify U.S. persons who have not been filing U.S. tax returns.
How to become compliant with the IRS
The IRS has made filing programs available that allow U.S. persons to become compliant with their overdue U.S. tax filing obligations, and, for the most part, avoid any penalties.
The most recent program is called the “Streamlined Foreign Offshore Procedures”. If the U.S. person qualifies for this program, he or she can generally get themselves caught up and compliant with the IRS, by filing complete U.S. tax returns for the three most recent tax years, as well as filing six years of the Report of Foreign Bank and Financial Accounts Form (FBAR or FinCEN Form 114).
Hutcheson & Co. LLP has extensive experience helping individuals and corporations become compliant with their U.S. tax filing obligations. If you are a U.S. person, and would like to see if you are eligible for the “Streamlined Foreign Offshore Procedures” or have questions about FACTA or the IGA please consult with one of our qualified professionals.