No One’s Exempt From the U.S. Tax Man

Brad Chapman, LLB
Manager of Legal/Compliance

September means back to school and work after summers spent at the beach and on sun-soaked vacations. Amid the ramp-up in activity, investors often use this time of year to review their portfolios, financial plans and other money matters. One task some of us may be overlooking, though, is whether we’re considered “U.S. Persons” by the American government, and if so, what proper financial planning and reporting is required.

In 2010, the U.S. government passed the Foreign Account Tax Compliance Act (FATCA) to target U.S. taxpayers using foreign accounts but who are not paying taxes on them. By some estimates, U.S. persons owe more than $100 billion annually in unpaid U.S. taxes. Given the fragile state of the U.S. economy, the U.S. government is clearly eager to collect these tax revenues. The IRS obtains these tax revenues by requiring foreign financial institutions (including investment management firms) to determine if clients with accounts holding more than $50,000 are “U.S. persons.” The institutions will be required to document and track them over time, and report the identity and details of their account holdings to the IRS.

Canada is currently negotiating an agreement with the U.S. that would result in the CRA being able to collect the relevant account information from Canadian financial institutions and forwarding it to the IRS. The Canadian government believes such an agreement will avoid breaking Canadian privacy laws.

So how do you know if you are a “U.S. person?” Under U.S. tax law, you are a U.S. person if you are:

  • A citizen of the U.S. (including someone born in the U.S. but living in Canada who has not renounced their U.S. citizenship)
  • A lawful resident of the U.S. (including a U.S. green card holder)
  • A person residing in the U.S.
  • A U.S. corporation, estate, or trust
  • Someone spending a specified amount of time in the U.S., potentially including snowbirds who spend winters south of the border.

If you are one of the approximately one million U.S. persons who lives in Canada, you are already required to file a U.S. tax return reporting your world-wide income and other information. Under FATCA there will be even more information filing requirements for you, and new requirements for your Canadian financial institution. Financial institutions will be required to ask for more information to determine if you are a U.S. person. If you refuse any requests for information or documentation, under FATCA you are deemed to be a U.S. person and will be subject to the 30 per cent withholding tax on your U.S.-sourced income.

Of course, if you are a U.S. person and haven’t been filing U.S. taxes, FATCA will affect you the most. Since Canadian financial institutions will be required to help the IRS identify U.S. persons and their foreign investments, it will become a lot more dangerous if U.S. persons with investments in Canada fail to report their Canadian-based income.

What if you are not a U.S. person? FATCA’s impact will be less but you’ll still be affected. When you open an account, your financial institution will be asking you additional questions to determine whether or not you are a U.S. person. If you have existing accounts, eventually your financial institution will be in touch to determine if a U.S. person is involved or more information is required. If there is any indication of your being a U.S. person, you may be asked to provide additional information or documentation. Failure or refusal to provide such documents or information under FATCA will deem you a U.S. person. As a result, your Canadian financial institution will be forced to withhold and send to the IRS 30 per cent of any U.S. payment received by your account. You might also find that you are prevented from opening any new accounts or even forced to close existing ones.

While FATCA is U.S. legislation, determining exactly how it will be implemented in Canada has been delayed many times. The latest target date for implementation is now July 1, 2014. A reciprocal agreement with the U.S. is being negotiated with the Canadian government now. The full extent of its actual regulatory requirements will not be known until the Canada/U.S. intergovernmental agreement is finalized, possibly by this fall. Nevertheless, FATCA is coming to Canada in the near future.

 

The article is not intended to provide advice, recommendations or offers to buy or sell any product or service. The information provided in this report is compiled from our own research and is based on assumptions that we believe to be reasonable and accurate at the time the report was written, but is subject to change without notice.

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