FATCA and Non-US Filers, the odds of the IRS finding you are increasing
March 27, 2014 (Vancouver and Calgary) Tax announcements don’t usually get the same attention as the Olympics, politics or other stories that commonly hit the front page of newspapers. But if you are a US person who has not complied with your annual US tax filing requirements, you should have paid attention to Canada’s recent signing of an agreement with the US to govern the application of FATCA in Canada. The US requires all US persons, to file US tax returns reporting their worldwide income regardless of where they reside or where the income is earned.
Canada’s Foreign Account Tax Compliance Act agreement will increase the IRS’ ability to identify US persons in Canada who have not filed their required US tax returns and disclosures of financial accounts and other interests outside the US. Even where US persons do not owe US tax, the penalties for failure to file may be significant.
Warren Dueck, a US-Canada tax specialist notes that, “by filing now and doing so voluntarily, most US persons in Canada will avoid any penalties being assessed by the IRS and likely not have any tax liability. Where the IRS contacts US non-filers resident in Canada, they will be deprived of alternatives that could eliminate their US tax liability and have a much higher likelihood of penalties being assessed.”
FATCA is US law that becomes effective in July 2014. It is relevant to US persons who have bank, brokerage, insurance, mutual funds and other financial accounts in Canada and other locations outside the US. Canadian financial institutions will now be obligated to provide that information to Canada Revenue Agency (CRA). The CRA will then provide that information to the US Internal Revenue Service (IRS).
The information to be provided to the IRS includes the account holder’s name, contact information, account balance and earnings in the account. Individuals who ignore their financial institution’s requests and do not identify themselves as either a US person or not being a US person will have their account information provided to the IRS.
FATCA was passed into law in the US in 2010 in response to the IRS’s discovery that UBS, a Swiss bank was assisting its clients evade US tax. UBS was fined by the IRS US$780 million for its actions and was required to disclose 4,500 accounts held by US persons. UBS’ accounts held by non-filing US persons had a total value of approximately US$18 billion.
Canada’s agreement with the US on FATCA provides some important exceptions to reporting. Canadian financial institutions will not be required to report to CRA and the IRS on registered savings plans such as Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Educational Savings Plans, Tax-Free Savings Accounts and certain accounts under $50,000. The exemption of these accounts from tax in Canada and reporting under FATCA does not exempt these accounts from US tax. With respect to RRSPs and RRIFs, US persons may elect to defer US tax on these accounts by making the appropriate election on a US tax return.
The IRS has introduced two programs to encourage non-filing US persons to become current. Introduced late in 2012 the “Streamlined” program requires qualifying US persons to file the last three years of delinquent tax returns and six years of financial disclosures. No penalties will be assessed under the Streamlined program. Most qualifying taxpayers under the Streamlined program will typically owe no US tax because they can claim Canadian tax as a credit against their US tax liability and claim certain other provisions to reduce or eliminate their US tax exposure.
Non-filing US taxpayers can also file under the Offshore Voluntary Disclosure Program initially introduced in 2009 and 2011. It requires filing eight years of delinquent US tax returns, related disclosures and extensive documentation.
Canada’s FATCA agreement with the US obliges Canada to inform the IRS of US persons with financial accounts in Canada. It also requires the US to identify Canadians with financial accounts in the US and disclose the relevant information to the CRA. This information will allow both the IRS and CRA to match that information with the individual’s tax returns.
For purposes of reporting to the US, US persons include US citizens and individuals who reside in the US. The fact that a US citizen may reside in Canada and have never lived in the US or had no income from US sources does not alter their US tax filing obligations. That same principle applies to so-called “accidental Americans” who were born in the US or born in Canada to a parent who is or was a US citizen. “Green-cards” that have not been formally abandoned or revoked obligate their holder to file US tax returns with the risk of penalties being assessed. Similarly, snowbirds who are present in the US for more than 120 days over a three year period will be a US resident unless they have reported to the IRS that they have a closer connection to Canada.
ABOUT W.L. DUECK & CO LLP
W.L. Dueck & Co. LLP’s US is a team of over 20 tax professionals with offices in Vancouver, Richmond and Calgary that work exclusively on US and cross-border tax issues. Our clients include Canadian businesses and individuals with investments in the US and US citizens resident in Canada. We provide both tax consulting and tax return preparation services. We work with individual and business clients and their legal, accounting and financial advisors.