In 2010, the U.S. government passed the ‘Foreign Account Tax Compliance Act’ (FATCA). This new compliance act requires any U.S. person, Resident (Green Card), or Non-Resident Alien, who meets the reporting thresholds for a specific tax year to disclose information regarding their foreign financial accounts and other foreign assets to the U.S Internal Revenue Service (IRS) (Also read: Foreign Bank Account Reporting (FBAR) & Foreign Account Tax Compliance Act (FATCA)).
This legislation is putting pressure on many countries, including Canada. The U.S. Government wants the financial institutions and governments of other countries to comply with the FATCA regulation and provide financial information of any individual considered to be a ‘U.S. Person’ by the IRS (Read: Are you a “U.S. Person” as defined by the IRS?).
AG Tax cross-border tax experts have looked into the impact that FATCA could have on Canadians along with other individuals worldwide when this part of FATCA as it comes into effect in July, 2014.
FATCA for Financial Institutions Worldwide
FATCA requires financial institutions all over the world to provide details of internationally-located accounts of U.S. taxpayers to the IRS, which can be used to keep track of if the U.S. taxpayer who owns offshore assets has disclosed the required details on the forms irrespective of whether the entity (individual, trust, corporation) has satisfied their U.S. reporting requirements that year.
Accounts held by U.S. citizens below $50k will be deemed compliant unless disclosure is a must regardless of account value, while accounts above $50k will need to be reported if the client has any U.S. connections.
Complying with FATCA would raise bank costs as they would face increased expenses implementing the new rules (additional work hours, and systems to verify every client’s details and see if the client is in any way connected to the U.S.). Also, it will put banks/financial institutions in a dilemma; disclosing clients’ information without their permission would mean violating the client’s right to confidentiality.
How FATCA Will Affect Canadians
FATCA could be more troublesome for Canadians due to our shared border as dual citizens, frequent visitors between countries, and inter-country marriages make a significant part of Canadian population connected to the U.S.
Situations that may lead to a person being considered as a ‘U.S. Person’:
Many Canadians have acquired dual citizenship in the past due to their close connection with both countries. For example, individuals who regularly visit the States on business and therefore spend a significant number of days in the U.S.; likewise for some retirees who head to the places like Florida to escape the harsh Canadian winters (also known as “snowbirds”).
Additionally, U.S. citizenship is automatically given to children born in Canada to U.S. parents, or if a child is born in U.S. to any foreign citizen (Canadian residents in this case), regardless of whether the citizenship is desired or not. This ‘U.S. citizenship’ status has to be officially renounced (Read: Requirements for renouncing U.S. Citizenship or relinquishing a Green Card) by the person. If an individual has not done so, they should consult a tax professional before the IRS considers them as ‘tax evaders’ and subjects them to penalty.
Even if the child has one U.S. parent and has never been to the U.S., he/she could be considered a U.S. citizen and would need to report their non-U.S. accounts and financial assets to the IRS.
A Canadian individual who is not subject to U.S. taxes may be considered a U.S. person from FATCA standards because their spouse is an American. In such cases, any shared accounts, mortgage, savings, or life insurance policy details have to be reported to the IRS by filing the required forms.
Penalties
A 30% withholding tax will be levied on all U.S. income flowing to the bank, and on sale of U.S. securities as penalty for not complying with the FATCA regulations.
Although, the Canadian Banking Association (CBA) has voiced its issues to the IRS and U.S. Treasury, it will most likely go unheard. As per tax expert Allison Christians, “The way the U.S. laws are written, financial institutions around the world have an obligation to ensure that any accounts that are held by American people with U.S. status, that information about that account is given to IRS.”
According to Christians, this new law could also significantly increase the annual cost of filing U.S. tax returns, which has been estimated from $500 to several thousand dollars.
Cross-border tax rulings can be complex. Even one additional day spent in the States could subject an individual to file returns in both countries. It is highly recommended for all entities (personal or corporate) with any U.S. ties to contact a cross-border tax professional immediately.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
