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Americans in Canada: FATCA Agreement Signed

07/02/2014


Kevyn was quoted in the Globe and Mail on February 5 on this topic.

The Foreign Account Tax Compliance Act (“FATCA”) is a U.S. law designed to catch Americans with investments offshore.  It requires non-U.S. banks and other financial institutions to report to the IRS accounts that are held by Americans. An American is anyone who is a U.S. citizen or resident under its tax laws.

Who has to worry

Every year, Americans are required to file U.S. tax returns and reports of their foreign accounts. This is true even if they do not live in the United States. The penalties for not doing so can run into the tens, or even hundreds of thousands of dollars.

Now the IRS will have a way of finding a large number people who neglect to include all their incomes on their U.S. returns. The real targets are people living in the U.S., hiding money offshore. The biggest impact, however, will be on U.S. citizens living abroad who haven’t been filing returns. There are estimated to be a million or more U.S. citizens living in Canada, plus some green-card holders and others - more than in any other country. The overwhelming majority don’t file, but they generally don’t owe any tax, either.

Financial institutions

For banks (and other financial institutions like brokerages, life insurance companies, credit unions, etc.), the IGA is helpful, because it will limit their work, and they can provide information only to CRA. This process is cheaper, and makes it easier to comply with privacy legislation. Some small financial institutions are exempted from the requirement to track their U.S. clients.

Banks will generally be able to ignore accounts under $50,000, and insurance contracts with a balance or value under $250,000. But for accounts over that amount, they will be required to look through their electronic records for indications of U.S. status, such as:

  • Identification
  • U.S. place of birth
  • Address
  • Telephone number
  • Standing instructions to transfer funds to a U.S. account
  • Power of attorney with a U.S. address

If they find one or more of these things, they will need to assume U.S. status, or dig deeper. They will likely require the holder complete form W-8BEN (to certify non-US status), or W-9 (to certify US status). These forms are signed under penalty of perjury, so lying is a serious offence.

For accounts valued at over $1,000,000, they must inquire as to whether the client’s relationship manager knows about U.S. status, and  they may be required examine their paper records as well. As a practical matter, anyone with this level of account should expect a requirement to provide the bank with form W-8BEN or W-9.

A client who refuses to answer the questions when asked will likely be required to leave the bank.

This also applies to corporate accounts where the individual with signature authority appears to be an American.

Individual taxpayers

For most Americans in Canada who haven’t started filing U.S. returns, the IGA means the clock starts ticking now. The IRS will soon start receiving information that is computerized, reasonably comprehensive, and fairly accurate.  So it will soon be able to find many more non-filers.

FATCA implementation is required to start July 1, 2014. By early 2015, the IRS will start receiving meaningful information. By 2016 it will have pretty good information. People who don’t file their 2015 return by late 2016 should expect a friendly reminder letter from the IRS by early 2017. The letters will get progressively less friendly over time.

Right now, the IRS is offering a number of ways to come in from the cold. The “streamlined” approach allows applicants to file only 3 years of returns and 6 years of Foreign Bank Account Reports (FBARs). The vast majority of such people will have no tax or penalty (and where they do have tax, it’s mostly offset by foreign tax credits on their Canadian returns).

The reason the IRS waives the penalty for these people is that most didn’t know that they had to file, or what they had to file. By 2017, with the publicity and activity, that excuse will be gone.  So don’t be surprised if the streamlined program is closed by then.

The political angle

The Canadian government has already been castigated by some people as insufficiently defending our sovereignty, by allowing FATCA to proceed. With the conclusion of this IGA, it’s likely to get more of the same.

The IGA, however, merely implements and codifies what is already allowed under the existing tax treaty – an exchange of information to allow both countries to enforce their tax laws. The difference is the IRS and CRA will actually do it to a much greater extent than they have in the past.

The agreement also provides for a reciprocal exchange – the IRS will provide CRA with information on Canadians with U.S. accounts (it is likely that some additional U.S. legislation will be needed to implement this process).