Skip Ribbon Commands
Skip to main content

A New Development in the IRS Offshore Voluntary Disclosure Initiative Affects Americans in Canada

03/06/2011


In a previous blog, I wrote that US citizens and green-card holders who were delinquent in their US filing responsibilities generally had three choices:

  • File 8 years' returns, and pay a penalty of 25% of the greatest amount of their liquid assets over that period of time
  • File "quietly" and hope not to get noticed, with a risk of substantial penalty
  • Not file and hope to avoid detection (not a good bet)

The IRS has added a new possibility that is much more attractive for many people. The new option reduces the penalty to 5% for taxpayers who:

  • Are foreign (non-US, e.g. Canadian) residents
  • File in accordance with the 8-year voluntary disclosure
  • Reside in a foreign country
  • Have made good faith showings of timely compliance with all tax reporting and payment requirements in the country of residency; and have $10,000 or less of U.S. source income each year.

For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence.

Example 1

The taxpayer is a U.S. citizen who has lived and worked as a corporate executive in Canada since 1995. His income has included earnings in excess of $250,000 in each year, as well as bank interest and investment income on financial accounts that had a high aggregate balance of $1.2 million in 2009. He has paid all required taxes on his earnings and investment income in Canada every year, but has filed no US income tax return since moving out of the United States. In addition to his financial accounts, the taxpayer has acquired a personal residence in Canada with an equity of $900,000 and an automobile worth $85,000, both financed with previously taxed savings from the US as well as his salary and investment earnings in Canada.

Because the taxpayer was fully tax compliant in Canada, he will be eligible for a reduced offshore penalty of 5% of the value of the financial accounts, or $60,000. The residence and automobile will not be included in the penalty base because the funds used to acquire them were fully taxed in the Canada.

Example 2

The taxpayer is a US citizen who has lived in Canada since 1995. He is an entrepreneur who developed his own software business ABC Inc., which he operated as a wholly owned corporation, incorporated in Canada, until he took the corporation public in 2005. After the IPO, the taxpayer sold ABC stock at a capital gain of $5 million, and retained other ABC stock with a market value of approximately $20 million. He used $2 million of the stock proceeds to purchase a personal residence and put the remainder in his investment accounts. His income has included salary exceeding $250,000 in each year, the $5 million capital gain in 2005, and bank interest and investment income on financial accounts that had a high aggregate balance of $3.8 million in 2009. He has paid all required taxes on his earnings, capital gain, and investment income in Canada in every year, but has filed no US income tax returns since moving out of the United States.

Because the taxpayer was fully tax compliant in Canada, he will be eligible for a reduced offshore penalty of 5% of the value of the financial accounts, or $190,000. The ABC stock and the personal residence will not be included in the penalty base because the funds used to acquire them were fully taxed in the country of residence.

For more information, please contact myself or your local MNP Tax advisor.

Subscribe to email updates of MNP Tax blog posts here >>