Unlike most other countries, including Canada, the United States requires U.S. citizens, dual citizens and green card holders, irrespective of their place of residence, to not only file an income tax return, but also to annually report holdings in “foreign financial accounts” and ownership of certain non-U.S. corporations, partnerships and other entities.
For some, this requirement to file a return may have been unknown. For others, the filing requirement may have been known, but ignored-largely on the perception that no benefit would be achieved by filing a nil return.
However, irrespective of whether or not any U.S. Tax may have been due, there are penalties associated with the failure to file. This failure to comply, and the related penalties, has now become a huge issue due to the recent push by the Internal Revenue Service, under the U.S. Foreign Account Tax Compliance Act (FATCA), to search out those individuals who are not complying. Potentially impacting as many as one million Americans and green card holders residing in Canada, this enforcement by the Internal Revenue Service could also have a significant impact. This article summarizes some of the annual filing requirements and highlights various considerations.
Annual Filing Requirements
The enforcement efforts by the Internal Revenue Service are not only directed to ensure filing compliance of the federal income tax returns, but also to ensure that non-resident U.S. citizens (including those with dual citizenship) and green card holders meet the following annual reporting requirements:
1. “Foreign financial accounts”: Where the cumulative balance in all foreign financial accounts held outside of the U.S.exceeds $10,000 at any time of the year, a detailed listing of each account must be provided and reported on U.S. Department of Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)
The definition of a financial account is far reaching and includes Canadian bank accounts-chequing and savings accounts-securities and brokerage accounts, RRSPs, RESPs, TFSAs, insurance and annuity policies with a cash surrender value, commodity futures or options accounts, mutual accounts, etc.
The penalty for “non-willful failure” to report this information is significant (up to $10,000 per account per year). If the Internal Revenue Service deems the non-compliance to be a “willful failure”, the penalty is significantly higher. It can be as much as the greater of:
a) $100,000; and
b) 50% of the amount in the account at the time of violation.
This is a very complicated form and is full of “traps” and should only be completed by an experienced Chartered Accountant.
2. If the U.S. citizen owns 10 percent or more of a Canadian or other non-U.S. corporation, partnership or other entity, this ownership must also be disclosed. Again, the penalties for failure to comply are harsh, up to $10,000 per year for each entity.
The statute of limitations does not run for an unfiled return. Therefore, technically, a non-filer would be required to file for all years when the U.S. citizen had income exceeding a small threshold amount. For a brief period, under the U.S. 2011 Offshore Voluntary Disclosure Initiative, the Internal Revenue Service accepted returns for the period 2003 through to 2010 and did not look back further; however this expired on September 9, 2011. Neither the filing of a Canadian income tax return nor paying taxes in Canada during this time mitigates the obligation to file in the United States.
Furthermore, renouncing one’s U.S. citizenship may alleviate obligations to file on a go-forward basis, but does not eliminate any past obligations owing to the Internal Revenue Service. As well, even renouncing one’s citizenship will not reduce the obligation to file in the future until one has filed for at least five years.
Since failing to file U.S. income tax returns could be a criminal offence, individuals who have questions regarding their obligations may want to seek guidance from a Canadian Attorney who has experience with such issues.
Further Tax Considerations
Other parties potentially impacted by the legislation may also extend to spouses and dependents, depending on their individual citizenship status. For example, if children have Registered Education Savings Plans and Canadian bank accounts, the cumulative total of which was more than $10,000 at any time during the year, and the child is either an American citizen or dual citizen, the child would also have been required to report these accounts as foreign financial accounts on the FBAR. Furthermore, since a Registered Education Savings Plan is a Canadian trust, there are also various U.S. foreign trust reporting obligations.
It is important that you encourage the individuals potentially impacted by the Internal Revenue Service compliance initiative to:
1) investigate and understand the implications of the compliance enforcement actions of the Internal Revenue Service;
2) establish an action plan to understand the options available to become compliant;
3) understand the potential costs associated with those options; and
4) commence the process of preparing the necessary filings to come into compliance with the U.S. reporting requirements.
Unfortunately, this matter will not be going away and ignoring the situation is not a rational option-to ignore the reporting requirements may only result in significantly increasing the exposure of the individual to potential penalties. Such legal obligations may ultimately fall on executors or beneficiaries of estates of U.S. persons. If they fail to comply for the deceased, they may be liable for the U.S. tax obligation.
If you have any questions with respect to the above or any other income tax matters, please contact Joseph A. Truscott, Chartered Accountant at (905) 528-0234 or email Joe at [email protected].