On February 5, 2014, details of the Foreign Account Tax Compliance Act (FATCA) agreement between Canada and the United States were released. The intergovernmental agreement will expand the sharing of information between the two countries in an effort to reduce offshore tax evasion by U.S. citizens holding assets outside of the United States.
There has been a lot of controversy since FATCA was originally enacted by the U.S. in March, 2010. FATCA would require non-U.S. financial institutions to report to the U.S. Internal Revenue Service (“IRS”) accounts held by U.S. taxpayers outside of the U.S. commencing July 1, 2014. If Canadian banks and financial institutions refused to comply, they would be subject to a 30% withholding tax on payments from the United States. Canadians were concerned, and rightly so, that providing this information would violate Canadian privacy laws.
The new agreement modifies the requirements of the U.S. domestic law. It allows Canadian Financial Institutions to provide information on U.S. account holders directly to the Canada Revenue Agency (“CRA”). The CRA would then provide only the required information to the IRS under the existing safeguards of the exchange of information provisions of the Canada-United States Income Tax Treaty.
The agreement also exempts most registered accounts (RRSP’s, RRIF’s, RPP’s, RESP’s and TFSA’s) held by Canadians from these reporting requirements.
So what does this mean to you? If you are not a U.S. citizen, or if you are a U.S. citizen living in Canada who has been complying with your U.S. tax filing and reporting obligations, then probably nothing. On the other hand, if you are a U.S. taxpayer (citizen, permanent resident, or Green Card holder) and you have not been filing U.S. tax returns and other required disclosure documents, then the IRS may soon become aware of you.
By now, most U.S. citizens living in Canada know that they have U.S. tax filing obligations even if they do not have any U.S. source income or have never lived in the United States. Until recently, these taxpayers may have not been aware of their filing requirements and the U.S. IRS has not been active in seeking these people out. This has all now changed and the U.S. government is penalizing non filers. FACTA will give the IRS additional tools they can use to seek out these taxpayers.
There is currently an amnesty program available that allows most taxpayers to come clean and bring their tax filing obligations up to date. The new simplified program that came into place in September, 2012, allows taxpayers with simple returns who owe less than $1,500 of income tax per year to bring their tax affairs up to date by filing 3 years of U.S. income tax returns and 6 years of FBAR’s without incurring any penalties.
If you are an individual who has ties to the United States and therefore has U.S. tax filing requirements, we urge you to seek professional advice from your local EPR member firm before Uncle Sam comes knocking on your door.
EPR Kielstra & Company