Ramping up for FATCA: Americans living in Canada

In case you have just starting to catch wind of FATCA and you are wondering if you are going to get caught up in its web, you might find this post very useful.  I have gone to the Internal Revenue service (IRS) website and pulled out their passages on American’s living in Canada and the expectations on how they will be handled under FATCA – coming globally January 1st, 2013.

The IRS has clearly stated that “All persons born in the United States are US citizens.  This is the case regardless of the tax or immigration status of a persons parents.  Furthermore, a person born outside the United States may also be a US citizen at birth if at least one parent is a US citizen and has lived in the United States for a period of time.”

This is the link to that information from the IRS website; http://www.irs.gov/businesses/small/international/article/0,,id=244868,00.html

If you are of the belief that as an American living in Canada that you do not need to file a US tax return because you do not generate any US source income in any way, that is also incorrect;  “The IRS reminds you to report your worldwide income on your US tax return and lists the possible consequences of hiding income overseas.”

More information on consequences of hiding income overseas (including Canada) in this link.  I have broken out some key facts below; http://www.irs.gov/businesses/article/0,,id=180946,00.html

As a US citizen living in Canada, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the US or not.

Not reporting income from foreign (including Canadian) sources may be a crime.  The IRS and its international partners (including the CRA) are pursuing those who hide income or assets offshore to evade taxes.  Specially trained IRS examiners focus on aggressive international tax planning, including the abusive use of entities and structures established in foreign jurisdictions.  The goal is to ensure US citizens and residents are accurately reporting their income and paying the correct tax. 

In addition to reporting your worldwide income, you must also report on your US tax return whether you have any foreign (Canadian or international) bank or investment accounts.  The Bank Secrecy Act requires you to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if:

  • You have financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and
  • The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

More information on foreign financial account reporting requirements is in News Release FS-2007-15, Foreign Financial Accounts Reporting Requirements and Publication 4261, Do You have a Foreign Financial Account?

This link below outlines the filing expectations for US Citizens and resident aliens abroad.  You have until June 15th to file your US tax returns each year:

http://www.irs.gov/businesses/small/international/article/0,,id=97324,00.html

Most common question I have been asked:

“I am a U.S. citizen who moved to Canada to live and work there as a Canadian permanent resident, do I pay both U.S. and Canadian Taxes?

Answer: As a U. S. citizen living in Canada you:

Are required to file annual U.S. income tax returns and may be required to file certain information returns if applicable (e.g. Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans; Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)).

You must report your worldwide income on your US income tax return if you meet the minimum income filing requirements for your filing status and age.

You must contact the Canadian Government to determine whether you must file a Canadian tax return and pay Canadian taxes – unless you are already filing tax returns here in Canada, then this step is obvious.

You may be able to elect to exclude some or all of your foreign earned income, if certain requirements are met, or to claim a foreign tax credit if Canadian income taxes are paid.

Behind on your filing to the IRS, are you?

The IRS began an open-ended offshore voluntary disclosure program (OVDP) in January 2012, on the heels of strong interest in the 2011 and 2009 programs, which may end at any time.  The intent of this program is to offer people with undisclosed income from offshore accounts another opportunity to get current with their US tax returns.  The 2012 OVDP has a higher penalty rate than the previous program but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.

Rumour has it that in September, the IRS will be releasing some new documents (besides the final regulations) aimed at helping Canadians file their US tax returns up to date – the IRS wants the most recent 3 years and 6 years of FBAR information from Canadians.

My thoughts here are that the IRS thinks all Americans living in Canada are not paying taxes so that anyone with over $1500 owing will still be penalized.  Once these US persons provide proof of their filing of Canadian tax returns at a higher rate, then the best the IRS can get from these residents if valid certifications and by adding them to the database, another potential income source to track.

FAQ Offshore voluntary disclosure program:

http://www.irs.gov/businesses/small/international/article/0,,id=256774,00.html

So if after all this you are unsure if you need to file you might want to seek out an accountant or lawyer which a strong US presence to advise you.  Remember if you are a US person and you let your bank know, they are required under FATCA to notify the IRS.

At the very least you should preapare your US tax returns for the previous 3 years and include the Canadian taxes paid under “foreign tax paid” to see where you fall under FATCA.  Then take them to an accountant with a strong knowledge of US tax in order for them to ensure the US return is correct and have them advise you on where they feel you fall under FATCA.  From there… It’s up to you.

There is no hiding from FATCA, so prepare for now and prepare for the future before the IRS gets to you first.

Advertisements

New Draft FATCA Forms: W8BEN, W8BEN-E and FFI Agreement details

The much anticipated new FATCA compliant W-8BEN forms have been released in draft version by the IRS:

http://www.irs.gov/pub/irs-utl/formw8benindividualexecirculation2.pdf.   The form W-8BEN, the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (Individual) and http://www.irs.gov/pub/irs-utl/formw8benentityexeccirculation2.pdf, The Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding (Entities).

With a new W9 and W-8IMY on the way and these forms still in draft form in it’s consultation stage, the IRS asks that the existing forms be used and not the new ones yet. 

The new withholding certificates effectively divide the information reporting requirements between two classes of payees: nonresident alien individuals and all foreign entities other than individuals.

New W-8BEN will simplify the declarations required to be made by foreign individuals. It will only require basic identifying information, declarations with respect to treaty status (as relevant), and a general certification as to foreign status.

New W-8BEN-E will require each foreign entity to make two distinct declarations:
The foreign entity’s status for purposes of the US outbound withholding tax regime (e.g., the 30 percent withholding tax generally imposed on US-source dividends paid to non-US persons unless reduced by an applicable income tax treaty). This will be the same as the declaration required in the current IRS Form W-8BEN, as last revised in 2006.
The FATCA-related declaration, which will require an entity to provide substantial detail by declaring its overall status for FATCA purposes from among twenty-four different categories (all described in detail in the Proposed Regulations).

In addition, new W-8BEN-E will require a foreign entity to provide its Foreign Financial Institution Employer Identification Number and FATCA ID, as applicable (both are discussed in the Proposed Regulations).

To learn more about the withholding of tax on nonresident aliens and foreign entities, see IRS Publication 515 (2012).

FFI Agreement details:

http://www.irs.gov/businesses/small/international/article/0,,id=258313,00.html

Details on the FATCA Registration Process for Foreign Financial Institutions (FFIs)*

 
In building an online system for foreign financial institutions (FFIs) to register as participating FFIs, the IRS has developed a flexible system that has the ability for the FFI  to create accounts, chose login and passwords, create challenge questions and maintain the account once formed. The automated system aims to make the registration process as quick and easy as possible, facilitates communication electronically and provides e-mail alerts to keep the registration process moving forward.

Key Points:

  • FFIs will register and enter an agreement (a certification, if a Registering Deemed-Compliant FFI) through an online registration system.
  • Each FFI must select a FATCA Responsible Officer (RO).
    • This individual will be identified in the FATCA registration system.
    • In a typical case, the RO will be the individual who will sign the FFI agreement.
  • The RO may select Points of Contact (POCs) to help complete all aspects of the registration process except signing.
    • Up to five POCs may be selected.
    • There must be at least one in-house POC (may be the RO).
    • It is anticipated POCs may include certain third-party individuals, both local and US (e.g., service provider).
  • It is anticipated that there will be power of attorney procedures allowing the RO to delegate full FATCA registration duties (including signing) to another in-house individual.
    • This in-house individual with the power of attorney from the RO will be identified in the registration system as the FFI’s Authorized Third Party (ATP).
  • If it proves unworkable for the Responsible Officer (RO) or another in-house individual to register the FFI, it is anticipated there will be power of attorney procedures allowing the RO to delegate full FATCA registration duties (including signing) to certain U.S.-licensed tax professionals that are subject to our regulatory jurisdiction.
    • The U.S.-licensed tax professional with the power of attorney from the RO l will be identified in the registration system as the FFI’s Authorized Third Party (ATP).
  • FATCA registration is a user maintained account – it can be edited or modified by the user.
  • The person signing the FFI agreement (or certification) must make an affirmative statement during the registration process that he or she has the authority to act for the FFI.
  • Positive ID verification will be required for the individual who signs the agreement/certification on behalf of the FFI.
  • Person who signs the agreement/certification will be issued a FATCA Individual identification Number (FIIN) following ID verification.
    • If this individual already has an SSN or ITIN, he/she may choose to use it to obtain his/her FIIN electronically through the registration system If this individual does not have an SSN or ITIN, or does not want to provide his/her SSN or ITIN electronically to obtain a FIIN, he/she must obtain his/her FIIN by filing a short paper form along with a copy of specified ID documentation.
    • The FIIN is the only identification number necessary for the individual to complete the registration process.
  • IRS will closely monitor the account creation and FATCA registration process