On the Fence about FATCA? Canada and U.S. Sign Intergovernmental Agreement on Foreign Account Tax Compliance Act

Ever since  I caught wind of  the Foreign Account Tax Compliance Act, back in 2010, FATCA has been near the top of my radar.  For those of you who are unaware what FATCA is, The Foreign Account Tax dept of financeCompliance Act (FATCA) requires citizens of the United States (present, past, those with citizenship who do not live there, those who worked there a specific number of day, and those who received “accidental” citizenship through birth), to report their financial assets held outside of the United States to the Internal Revenue Service (IRS).  If providing that information means that the IRS would be taxing you and you have been trying to hide these assets, FATCA requires foreign financial institutions to report your information to the IRS.  The intent of FATCA was to combat offshore tax evasion and to recoup federal tax revenues.   FATCA is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act.

As the tax manager at Computershare Investor Services and the Assistant Vice President of Tax for CitiGroup (CitiFund Services) I got to know FATCA very intimately and at one point or another became the Canadian lead on information dissemination and compliance.  After almost 11-years of interpreting legislation at the Canada Revenue Agency (CRA) deciphering this text came second nature and thus taking the FATCA regulations and translating them into English was not a difficult task, but more something that I had to do in order to teach myself the requirements so I could pass along that knowledge to my employers and to my clients.

The interesting thing about FATCA from a Canadian side was that with over a million “US Persons” here in Canada (probably much more now) I don’t believe the IRS understood that the majority of them were paying taxes in Canada and since the Canadian tax rate is higher than the US rate, there was some hesitation on the Canadian side to provide all this data to the IRS for no net gain.  Other countries rushed to sign intergovernmental agreements with the IRS to meet deadlines which have now been pushed out again as a result of the July 2014 start date for FATCA, but Canada did not.

The Canadian government was hesitant to force Canadian financial institutions to provide the very detailed information on Canadian citizens for fear that they would be double taxed, something the Canada-US Treaty strove to avoid.   In addition, the Canadian side wanted the Canada Revenue Agency included so that information could pass through secure channels and potential breaches of security and privacy could be avoided.  There was even talk that Canada refused to sign an agreement with the IRS, instead forcing the IRS to seek their own tax cheats from their own side of the border.

Then something changed.

The IRS began ramping up their search for US Persons via every mean possible – whether it was checking Facebook accounts to see where people are born, cross-checking it with school records – or by allowing people who had no previous knowledge of FATCA some amnesty when catching up on their delinquent tax returns, but then hammering them on their filing of the Report of Foreign and Financial Assets to the tune of $10,000 per late return – with no maximum.

People became scared, and when scared you have two choices to make.  Either flee or fight.  In this case it’s either comply or pray.

Those who chose to file had to wade through unclear rules and regulations and a lot of unclear information floating around on the Internet.  Is there penalty, is there not?  Will I be charges criminally, or will the IRS understand that I was not aware of my obligations.  Do I have to file 3-years of past-due returns or 10 years?  When are FBAR’s due?  Should this cost me $10,000 or $100,000?

Many questioned the over-reach on the US side while others commented that as an US citizen, the requirements were there and you should have known.

But with all that being said, on February 5th, 2014, Canada and United States announced that they have reach an agreement on Foreign Account Tax Compliance Act (FATCA).

The intergovernmental agreement lays out the details of how the US will be using FATCA to track down the Canadian financial activities of US persons to make sure they are paying required taxes to the IRS.

Under the terms of the agreement Canadian financial institutions will send some of the information they collect on their US clientele to the Canada Revenue Agency and the CRA will transmit the information to the IRS.

The agreement can be read in it’s entirety on the Canadian Department of Finance website.

My take from reading the release is that the Canadian government realized their hands were tied, however they were not going to allow the IRS to demand information which violates Canadian privacy laws and thus allowed the IRS to pursue their legitimate tax-base with the assistance of the CRA much in the same way the CRA and IRS work together to collect tax debts – through information sharing and not the actual collecting of debts for the other country.

Kerry-Lynne D. Findlay, the Minister of National Revenue said; “This is strictly a tax information-sharing agreement. This agreement will not impose any U.S. taxes or penalties on U.S. citizens or U.S. residents holding accounts in Canada. The CRA does not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose. This includes dual Canada-U.S. citizens. That will not change under this agreement.”

Changes to the FATCA legislation under this agreement include, but are not limited to;

  • Certain accounts are exempt from FATCA and will not be reportable, including Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RRIF), Registered Disability Savings Plans (RDSP), Tax-Free Savings Accounts (TFSA), and others yet to be released.
  • Smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from FATCA compliance.
  • The 30 percent FATCA withholding tax will not apply to clients of Canadian financial institutions, and can apply to a Canadian financial institution only if the financial institution is in significant and long-term non-compliance with its obligations under the agreement.

This intergovernmental agreement is only the beginning.  Recent G-8 and G-20 commitments agreed upon in September 2013, intended to fight tax evasion globally and to improve tax fairness, provide for an automatic exchange of tax information as the new global standard.  This agreement signaled an intention to begin exchanging information automatically on tax matters among G-20 members by the end of 2015.

So like it or not, FATCA is just the beginning of a world-wide crack down on tax evasion.

Still on the fence?

inTAXicating Tax Services works with several Canadian tax-preparation firms who specialize in US taxes, and FATCA compliance.  If you wish to get caught up, please feel free to reach out to us at info@intaxicating.ca.  If, you have further questions and wish to discuss your requirements, you can email, or call us at 416.833.1581.  If you wish to comment, you may do so below.

A Lesson in POWER: How to ALWAYS Level the Playing Field with the CRA.

Power is a funny thing.

Pretty much everyone wants it at some point in their life.

Most of the people who have it do not know how to use it properly.

To be honest, few will ever get it.

The most important thing to know about power is that it is most successful when used in two ways; either by declaring yourself King and having your cronies keep everyone else at bay by whatever means possible, or secondly by taking the time to get key players on your side and using your network to help you maintain power but all along helping those around you learn and grow, and they help everyone else under them do the same.

Which model do you think is most often associated with government tax collections agencies?

Having spent a lot of time working at the Canada Revenue Agency (CRA) in the collections and enforcement division and being responsible for training collections, enforcement and audit staff there I can honestly say not as many staff there who feel you have to do what they say no matter the consequences as you would think.

It is true that there are employees of the CRA who feel that being in a position of power allows them to do things, say things and act in a manner which is improper or unjustified.  There are also staff there who take their positions of power to a whole new level and they let their egos control their decision-making process which means they wield power in order to realize an outcome in their best interest, not yours.

I have seen how power corrupts and the result is never easy to correct.

The CRA has a lot of power.

Throughout my decade of employment at the Canada Revenue Agency I was surprised with how much power the Agency has and how many taxpayers feared this power.  I could hear collection officers tell taxpayers that they could clean out their bank accounts like “this!” (Insert snapping of fingers sound here), which is true, but also not true.  I learned to be subtle in my use of my apparent super-powers and the way I used my power was to visit my clients and by always making sure that when sitting with a taxpayer / representative that my chair was at its highest so that I would be looking down at them.  It was all I needed when dealing with the career tax evaders because it worked, but it was a tactic not necessary when dealing with 99% of the people I met with.

However, we already know that the CRA has a lot of power and in most cases before they use it, they are going to let you know first by phone, letter or a visit to your home or place of employment.  Once the CRA has decided they need to use their powers they are bound by the guidelines set out in the Income Tax Act and Excise Tax Act and by policies and procedures set out in their tax office.  The extent to which they use their powers is either their decision or it is influenced by their team leader or manager.

Once the CRA starts using their powers, your ability to control the outcome diminishes greatly. What you can control, is how much power you will ALLOW the CRA to use against you.

This is done by being proactive – reading notices, asking questions and keeping all your paperwork in one spot where you can access it once it is asked for.  But if you are past that point, or if it is just not possible, then you can take power back by enlisting the help of people who know the CRA policies, procedures and most importantly, their techniques and tactics.

If the CRA knew they were dealing with someone who knew more about their job, more about their techniques and more about how quickly they need to take an action which they claim is urgent, then the playing field is changed forever.

Having someone there to look after your best interests, who will tell you what the best plan of action for you, and you only, then taking that plan to the CRA and telling them the same is the best way to always level the playing field.  Negotiating is always easier when you know more than your opponent.

So please, if you have a tax problem, old or new, and you have been spinning your wheels with the CRA, the IRS, the MRQ, WSIB or the CRTC, don’t let it continue any longer.  Come visit inTAXicating.ca, or send us an email at info@intaxicating.ca and take advantage of our free consultation to leave how to put these issues behind you once and for all.

Have you ever been put in a position where you accepted something which was not in your best interests because the other side had all the power?

Happy to read your comments below.

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.