The Foreign Account Tax Compliance Act (FACTA) requires Canadian residents with US or dual citizenship to file tax returns with the IRS, regardless of whether or not this income was earned in the US. This, on the outside looks like double taxation. To add insult to injury, filing a tax return with the IRS is costly and most US residents living in Canada have no idea of the requirement. Talk about picking on the Middle Class.
In their never ending desire for pork barrel politics, the US government has taken a G20 agreement to exchange tax information in order to catch tax cheats, who hide accounts offshore to a new extreme under the threat of fines and sanctions of foreign banks. Under the Reports Foreign Bank and Accounts (FBAR) foreign financial institutions were required to report on US citizen accounts. The Government of Canada opposed this measure since it was illegal under Canada’s Privacy Act.
Canada and the US have reached a bilateral agreement which negates the requirement under the Foreign Account Tax Compliance Act (FATCA) or Canadian financial institutions to report on accounts held by US citizens or dual citizens to the IRS directly under the threat of a fine.
Effect on long time Canadian residents with dual and US citizenship
While the overall goal to catch tax evaders, who hide millions if not billions of assets offshore may be a noble goal, it makes absolutely no sense to hit US citizens or dual citizens who make their living in their chosen country. It unnecessarily hits Middle Class and low income people and even residents who may never have placed a foot in the US and the only reason they are citizens is due to one of their parents being American.
The Toronto Star describes the current requirement in some detail and quotes the example of a Canadian-US citizen, who they name Sheila, and is over 70 years old.
Banks won’t have to report information to the Canada Revenue Agency, which will share it with the IRS – but this just shifts responsibility. If you are a U.S. citizen, you must inform the IRS about your registered accounts held in Canada.
“There’s a big caution. This doesn’t mean that you’re exempt from U.S. tax filing requirements,” says Veronika Chang, a lawyer and tax specialist with Morris Kepes Winters in Toronto.
Of an estimated one million U.S. citizens living in Canada, many don’t report to the IRS because they’re unaware of their filing obligations. Others dread the expense of catching up on years of unfiled returns.
Toronto Star
Getting back to Sheila, she is over 70 and has a 40 year old daughter. Sheila is living on pensions. Her 40 year old daughter only earns $20,000 year, well below the poverty line. She lives with Sheila to make ends meet.
Sheila doesn’t consider giving up her US citizenship as an option, but checking with her accountant she determined that filing tax returns for the past three years is a costly option. She was quoted a charge of $350 to $500 a year to file tax returns each year and $50 for the Reports of Foreign Bank and Financial Accounts. Sheila figures that the bank would also charge fees for research of her financial information over the past six years, a requirement of FACTA.
“Giving up our U.S. citizenship does not seem to be a viable solution,” she says. “First, it is costly. Second, it is time-consuming.”
She checked with accountants, who said they’d charge $350 to $500 a year to file tax returns each year and $50 for the Reports of Foreign Bank and Financial Accounts (FBAR).
To get up to date, she has to file tax forms for three previous years and FBAR forms for six previous years. This is part of an IRS streamlined compliance program that took effect in 2012.
As well as accountants’ fees, she expects to pay bank fees to get access to many years of monthly statements to see how much interest was collected. Not knowing she needed them, she may have thrown them out.
Toronto Star
Opinion
The majority of US citizens living in Canada have been here for decades and have been law abiding tax paying upstanding citizens in this country. Their only real association with the US is family and a birth certificate. They have taken nothing from the US and in essence contribute to the US economy with travel to relatives and catalogue or on line shopping from US businesses.
While the intention of Congress may have been noble, it is targeting the wrong people, who should be left alone by the IRS. While banks do not have to report on registered accounts it is unclear if the Canadian government had intended to exempt these accounts period. After all Registered Retirement Saving Plans (RRSP) and Tax Free Savings Accounts (TSFA) were accumulated in Canada, under Canadian law and tax regulations. Canadian permanent residents, who happen to be US citizens should be exempt from filing tax returns with the IRS.
http://www.thestar.com/business/personal_finance/2014/02/11/us_tax_returns_required_for_dual_citizens_roseman.html
Last week, Canada announced a bilateral agreement with the United States to clamp down on tax evasion by U.S. citizens living in this country.
Starting July 1, the Canada Revenue Agency will share financial information about Americans living in Canada with the U.S. Internal Revenue Service – information that will come from Canadian banks.
Banks won’t have to report to the IRS on most federal registered accounts held by Americans, such as RRSPs, RESPs and tax-free savings accounts, Star reporter Les Whittington wrote about the deal.
While the exemption sounds like good news, U.S. citizens in Canada still have to report to the IRS on these tax-sheltered accounts if they hold $50,000 or more and may have to pay tax, as well.
Sources:
IRS Announcement 26 June 2012
Canada/US Bilateral Agreement – Gov of Canada
US Tax returns required by dual US citizens – Toronto Star