Last evening (January 13th, 2014), the CBC ran a short news story on the U.S. FATCA Act (the United States’ Foreign Account Tax Compliance Act). The passing of FATCA does carry significant implications for Canadian residents who are U.S. citizens, U.S. greencard holders, and/or their spouses. The CBC did a good job of highlighting some of the major implications the act will have. That said, I don’t believe this new piece of legislation is cause for mass panic.
It is true that FATCA will require Canadian financial institutions to disclose information about their U.S. citizen clients to the IRS. With that in mind, the consequences of that requirement need not be painted with a negative brush. For example, at one point, the covering anchor mentioned that a Canadian resident’s RRSP would need to be disclosed to the IRS. This is true. The requirement to disclose one’s RRSP has been an obligation of U.S. citizens who have such accounts for quite some time. FATCA now essentially makes it the responsibility of the bank/institution’s to disclose information about potential RRSP account holders to the IRS directly. The anchor went on to say that the RRSP could then be taxed by the IRS (as U.S. citizens have an annual tax filing obligation, irrespective of where they are living).
I thought that second comment, while potentially true, was a little alarmist – it is extremely rare for U.S. citizens to have to pay any U.S. tax on Canadian RRSP balances and/or income. Reason being, the IRS offers a simple check-the-box election where U.S. filers can in essence defer all taxation on the income generated within their Canadian RRSP’s. This in effect causes their RRSP’s to be treated consistently by both the Canadian CRA, and U.S. IRS. With this election in place, it is very rare that a U.S. person would ever have to pay any U.S. tax on their Canadian RRSP (as any U.S. balance owing on a withdrawal would presumably be wiped out and offset by Canadian foreign tax credits).
The message behind the FATCA act is loud and clear – under U.S. tax law, U.S. citizens (whether their citizenship be accidental, inherited, or derived through birth in the U.S.) have an obligation to file a U.S. income tax return every year, complete with the IRS’ non-U.S. asset disclosure forms. The IRS is aware of the fact that there are several non-compliant U.S. persons residing worldwide, and is consequently searching for such individuals.
It is important to note that the filing of one’s U.S. tax return, as well as the relevant asset disclosure forms, doesn’t necessarily mean that a U.S. filer is going to pay any U.S. tax. More often than not, the entire process of filing is nothing more than a paper-pushing exercise. While it’s true that U.S. tax practitioners in Canada can charge hefty fees, it’s important to appreciate the amount of work that’s involved in the preparation of a U.S. tax return. As an experienced U.S. return preparer, I can attest that a U.S. return for a U.S. resident is relatively simple and straightforward (much like a Canadian tax return can be simple and straightforward for a Canadian resident). Conversely, a U.S. tax return for someone who resides outside of the United States can become very complex, very quickly (simply due to the fact that international accounts and financial structures need to be assessed and reported upon using a completely different set of tax laws).
The purpose of this blog entry is not to sound off alarm bells, but to highlight the importance of a systematic approach to cross-border tax filing obligations. With proper planning, and the proper structuring of one’s investments, it is very possible to make one’s U.S. tax filing and disclosure obligations a predictable, simplified, and positive exercise.
If you are a U.S. citizen (or greencard holder) and you feel that FATCA might impact you, feel free to contact me firstname.lastname@example.org – I’m always happy to meet new people and help them through cross-border issues.
Canada is now the last of the G7 to sign this agreement with the US (announced early February, 2014). While it appears that our government has been negotiating with the U.S. in an effort to alleviate some of FATCA’s requirements, there is still uncertainty as to the final applicability (and timing) of the Act. It is certainly good news that some registered Canadian accounts will be exempt from the FATCA disclosure requirements; however, I maintain and wish to reiterate the importance of proper tax and investment planning for U.S. citizens residing in Canada. If you are a U.S. citizen residing in Canada, I still believe it’s only a matter of time before your bank or financial institution starts asking questions about you and your personal history, in an effort to comply with FATCA.
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