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There has been a lot of coverage in Canadian media recently about the requirement for US citizens and Lawful Permanent Residents (“green-card” holders) living in Canada to file US income tax and information returns. Many individuals resident in Canada have been shocked to learn that even though they may not owe any US tax, the IRS can go back many years and assess massive penalties for failing to report information about their income or assets. Although the IRS offered a special disclosure program earlier this year, the penalties applicable under that program will still be onerous for many who have been law abiding Canadian taxpayers. Despite the recent publicity, untold thousands of Americans in Canada remain non-compliant, either because they are still unaware of the filing requirements imposed on them by the US, or because they are scared off by the enormity of the potential penalties that could be assessed if they come forward to the IRS.
Now, the IRS is preparing to implement yet another filing requirement that will affect Americans living in Canada, and with these new requirements comes the potential for even more penalties for those who do not comply.
The US Hiring Incentives to Restore Employment Act of 2010 (the HIRE Act) provides that US individuals with an interest in a “specified foreign financial asset” during a tax year must attach a disclosure statement to their US income tax return for any year in which the aggregate value of all such assets is greater than US $50,000 (or a higher amount as the IRS may prescribe). This new filing requirement is in addition to the existing requirement to report “foreign financial accounts” on Form TDF 90-22.1, often referred to as an FBAR. To confuse bewildered US individuals even more, in addition to the accounts reported on the FBAR, specified foreign financial assets will include investments in a stock, security, or any other interest in a foreign entity and any financial instrument or contract where the issuer or counterparty is not a US person.
To their credit, in the draft instructions for the new Form 8938 released on September 28, 2011, the IRS indicates that it will raise the reporting threshold above $50,000 for some taxpayers. According to the draft instructions, for qualifying individuals living outside the US, the new reporting requirement will apply where the value of specified financial assets exceeds US $200,000, (US $400,000 for those filing a US tax return jointly with their spouse), on the last day of the year, or US $400,000 (US $600,000 for joint filers) at any time during the year. Nevertheless, many Canadian residents will have savings and investments (including RRSPs and TFSAs) or an interest in a Canadian company that exceed these amounts.
The new reporting requirement will apply for tax years that commenced after enactment of the HIRE Act on March 18, 2010. For most taxpayers this means they will need to start filing beginning with the 2011 tax year. Since the IRS has not yet released a final version of Form 8938 a transitional rule allows the 2011 Form 8938 to be filed with the 2012 tax return, if the 2011 tax return is filed before Form 8938 is released. For individuals that fail to file a complete and correct report when required, the IRS can impose penalties beginning at US $10,000.
US citizens and green-card holders resident in Canada will now need to add yet another item to their already long, time consuming and often costly list of US reporting obligations.
To find out more and how MNP can assist with US tax compliance and planning matters, please contact me at 604.637.1528 or 1.877.688.8408
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