The FATCA Act – Cause for Concern?

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 bsoucie@www.tewealth.com – I’m always happy to meet new people and help them through cross-border issues.

Update:

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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5 replies
  1. Ben says:

    What is different about FATCA is the very wide net it uses. As a practitioner, I understand your livelihood depends on American citizen clients. But tell it like it is: FATCA will catch CANADIANS; it will catch long-term tax-paying Canadian citizens, it will catch innocent children, it will catch disabled grannies, and it will catch the joint accounts held by 100% Canadian (never American) spouses. FATCA is simply extraterritorial legislation designed to ferret out everyone indiscriminately. It will provide the IRS a wonderful tool for doling out massive penalties, moving financial resources directly from Canadian hands to American hands. As designed, FATCA fails to meet any minimum standards of fairness, justice, or reasonableness.

    Reply
    • Brent Soucie says:

      Hello Ben, glad to meet you. I appreciate your comments and your passion about this important subject. Having spoken with hundreds of people about FATCA over the past couple of years, I can confirm that you are not alone in your thinking. FATCA will undoubtedly impact several Canadian citizens and residents. Another comment that I heard on the news this past week, that I think you’ll appreciate, was along the lines of “trying to avoid FATCA is like trying to avoid winter – the fact of the matter is that both will arrive.” All that said, I should stress that the purpose of my posting was not to broadcast my opinion, nor spur a debate on the ideology behind the act. Rather, I was aiming to stress the importance of understanding and planning. As a financial planner, it is of the utmost importance that we understand these sorts issues, and help our clients work through them. I’ve heard that there are as many as 1,000,000 U.S. citizens living in Canada permanently – all of whom stand to benefit from a firm understanding of FATCA and the implications it could have on them, and those attached to them. There are certainly steps that U.S. persons can take to better navigate U.S. tax law, and I feel it our responsibility as planners to help.

      Brent

      Reply
  2. ron says:

    I have read this article and your previous one regarding Canadians with IRA’s. Great reads. I have a situation and maybe you can help or point me somewhere. I am a Canadian and lived and worked in the US for 26 years. I moved back to Canada about 7 years ago and brought my American wife with me (she is a resident alien here and is working). I have a US IRA and have made distributions to myself (I’m pushing 62). While in the US I filed my own taxes with no issues. Since moving back to Canada I used a service because I wasn’t sure what to do but I’m not sure they know what they’re doing either. They have done things differently a few times.

    How is this suppose to work? While in the States, I used file form 1040 (married filing jointly). The service is also using form 1040 and entering our Canadian wages (converted to USD) plus IRA distribution but also using form 2555-EZ (Foreign Earned Income Exclusion). I don’t think I can use that form because I am no longer a resident alien.

    In the eyes of the IRS, what am I? non-resident alien? what form do I use to report IRA distributions and Social Security benefits since I’ve been approved for and will start receiving in a few months.

    How does FATCA affect me?

    Can my wife and I file jointly with the IRS or do we have to file separately?

    Any help would be appreciated.
    Thanks

    Reply
    • Brent Soucie says:

      Hello Ron,

      Glad to meet you. You and your wife essentially have two options for filing – I’ll try to explain. In the eyes of the IRS, your wife is a permanent tax resident (by virtue of her citizenship). Assuming you do not have U.S. citizenship, nor a U.S. Greencard, the IRS would view you as a non-resident alien. The two of you can file your U.S. return jointly if you so choose. There is an election available that allows a married couple with one U.S. citizen spouse to file as if both spouses were U.S. residents – with that election in place, your worldwide income would need to be reported on the joint return in addition to your wife’s, and you would be eligible to use U.S. Form 2555 to claim the exclusion for non-U.S. earned income. Making the joint filing election typically makes sense when your income levels are close, as it essentially serves to split all of your collective income between two sets of U.S. marginal tax brackets (which is, in essence, the major benefit of filing jointly).

      If you do not make this election, your wife would still need to file a 1040 with ‘Married Filing Seperately’ as the filing status. As you are receiving IRA income (and will be receiving U.S. social security income), you too would need a U.S. tax return; however, you could file as a non-resident (U.S. Form 1040NR). This would mean preparing two U.S. tax returns instead of one (one for your wife, and one for you), but would also ensure your Canadian income (and any indiviaully owned assets) are left off of both filings.

      Deciding which way to go can be a complex process, as both options would have their respective pros and cons. If you would like to work through the numbers together, so that you can better understand which filing status is more suitable for the two of you, feel free to contact me.

      All the best,

      Brent

      Reply

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