Frequent readers of this column will recognize that Canada – U.S. cross border tax matters are a recurring theme in my writings. This is because cross border issues in general, and the subject of foreign (i.e. a Canadian resident’s) compliance with U.S. tax law in particular, increasingly impact the lives of Canadians.
Currently, changes are underfoot which may well potentially affect:
1) the tax liabilities of Canadians who have purchased U.S. property (either real property or capital property, such as shares); and,
2) the general requirement for U.S. citizens resident in Canada to file tax returns to the U.S. Internal Revenue Service (I.R.S.), even if they live and work in Canada and have no other connection to the U.S.
In a previous article, I commented on the changing face of U.S. estate tax (which addresses (1) above). My focus in this article is to comment on the recent changes which may impact U.S. citizens living in Canada.
So what’s different?
This is probably the most common question that I get asked when U.S. citizens (resident in Canada) decide they want to obtain professional advice with respect to their U.S. tax situation. To be clear, such individuals are almost always hard working Canadians who carefully pay their fair share of Canadian taxes. The problem is that additional U.S. compliance requirements often apply.
In some cases, people have been aware of these obligations for years, but merely shrugged their shoulders, opting to do nothing on the basis that they were not on the “grid”, i.e. that the I.R.S. would simply leave them alone because they lived in Canada.
Our advice is that people should always strongly consider addressing their U.S. filing obligations to avoid compounding the problem. In particular, it is often the U.S. penalties that stem from the failure to meet various U.S. filing obligations (and not necessarily the tax obligations themselves) which prove to be most damaging to U.S. citizens living abroad. This is because taxpayers generally receive a credit to offset tax which has been paid in another jurisdiction, and because the U.S. has put increasing emphasis on filing compliance and has been ratcheting up penalties for failure to file.
Under the Bank Secrecy Act, U.S. citizens must file a form with the U.S. government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. This is Form 90-22.1, which is commonly known as the FBAR.
Taxpayers who willfully fail to file an FBAR can be subject to both criminal sanctions (i.e., imprisonment) and civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account for each year since 2004 for which an FBAR wasn’t filed. The IRS may reduce the FBAR penalty when taxpayers apply under the U.S. offshore voluntary disclosure program (“OVDP”), but a maximum FBAR penalty of 27.5% may still apply. Thus, as above, while a foreign tax credit may have been available to offset any tax which would have paid to the U.S., substantial penalties may still apply.
Some U.S. citizens who reside in Canada may opt to ignore the current filing requirements on the basis that OVDP is evolving, the forms are complicated, and because there may be huge fines for Canadian residents (who also happen to be U.S. citizens) despite the fact that such residents have been submitting Canadian tax returns every year.
Our view is that to adopt such a position would be a mistake, especially in light of recent changes that will make it more difficult for U.S. citizens living in Canada to escape the notice of the I.R.S. Canadians should understand, in particular, that the finalization of a Canada – U.S. Tax Information Exchange Agreement (“TIEA”) may well not only require Canadian banks to ask questions about the potential U.S. citizenship of its clients, but also to disclose Canadian taxpayer information to the I.R.S. (either directly or indirectly, through C.R.A.). This would be a radical shift from the current landscape, in which Canadian banks are not required to collect and pass on such information.
While this is still an evolving issue, U.S. citizens residing in Canada should be mindful of these changes and should carefully review their own cross border tax situation with the help of a professional.
Colin Green is an Associate at BrazeauSeller.LLP. Colin specializes in Tax & Estate Planning, but also practices in the areas of Corporate & Commercial Law and Family Business. To learn more about Colin, visit www.brazeauseller.com. Colin can be reached at firstname.lastname@example.org or 613-237-4000 ext. 227.