Have U.S. Ties, Beware of FACTA

 In Estate Planning, Investments, Tax

American taxpayers must file annual tax returns on worldwide income and disclose their accounts or other interests in foreign entities held outside of U.S. The U.S. differs from Canada in that tax reporting is required based on citizenship rather than on residency. An estimated seven million Americans live or work abroad, with about 1 million in Canada. Most, if not all, have a bank, investment, retirement and insurance-related products that might have to be reported.

The Foreign Account Tax Compliance Act (FATCA) came into force on July 1, 2014. The goal: prevent millions of U.S. taxpayers, and the global financial institutions that serve them, from evading U.S. tax on income and assets held outside U.S.

Under FATCA, non-U.S. financial institutions have to report certain information to IRS about U.S. persons’ financial accounts. More than 80 countries, including Canada, have FATCA-related agreements with the United States government. About 77,000 Foreign Financial Institutions (FFIs) have signed on with IRS. Failure to do so results in a 30% withholding tax on U.S.-source income to the financial institution or its clients.

Most FFIs provide the required information directly to the IRS. Under Canada’s Inter-Governmental Agreement (IGA) with the U.S., Canadian FFIs instead provide the information to CRA, which in turn provides it to the IRS.

Canadian FFIs must disclose bank, mutual fund, brokerage and custodial accounts, annuity contracts and some life insurance policies that have an investment or savings component.

Registered plans (RRSPs, RRIFs, RDSPs, RPPs, and RESPs) and TFSAs are excluded from the reporting requirement.

Last June the IRS modified its offshore disclosure programs to encourage U.S. citizens to come forward and report their assets and mitigate the risk of penalty or prosecution.

We advise our clients to:

Determine citizenship. In some cases, non-resident Americans are unaware of their citizenship. U.S. citizenship is dependent on a variety of factors, including age, parentage and acts of expatriation. Dual citizens, including Canadians who are unaware of citizenship, may be required to comply with IRS filing requirements.

Assess program eligibility. Most people can follow the 2014 Streamlined Filing Compliance Procedures, which apply to those who may not have been aware of their filing requirements and did not willfully fail to report their accounts. In the majority of cases, people who fall under this program are required to report three years of tax returns.

The 2014 Offshore Voluntary Disclosure Program (OVDP) is designed for people concerned that their failure to report income and disclose foreign financial assets wish to mitigate substantial penalties and possible criminal prosecution. The voluntary disclosure period under OVDP is the most recent eight tax years.

Comply now to avoid penalties later. Time and money spent on compliance now can save U.S. citizens from audits and penalties in the future. In many instances, citizens reporting for the first time find that they owe little or no taxes, but simply need to disclose income and assets. Coming forward before being investigated significantly mitigates the risk of penalties and provides individuals with greater clarity on their responsibilities to the IRS.

Completing one of two IRS forms has become part of the onboarding process.

  1. U.S. persons (generally, U.S. citizens or green card holders). They have to complete IRS Form W-9 Request for Taxpayer Identification Number and Certification to confirm their U.S. Social Security Number.
  2. Non-U.S. persons. Complete IRS Form W-8BEN Certificate of Beneficial Owner for United States Tax Withholding. The form confirms non-U.S.-person status and is used for reporting withholding obligations on U.S.-source income.

WHAT’S NEXT?

A Thomson Reuters poll in the U.K. found 55% of 300 FFIs surveyed expect to exceed their FATCA-implementation budgets. The IRS has suffered significant budget cuts in recent years, so it’ll be interesting to see how effective its FATCA enforcement will be.

Another interesting development is a lawsuit filed by a few Canadian citizens against the Canadian Attorney General suggesting the Canada-U.S. IGA violates provisions of the Canadian Charter of Rights.There’s also talk, given Congress is controlled by the GOP, that if the next president is Republican, we may see FATCA and Obama’s health care law repealed. Lastly, we may eventually see FATCA applied on a global scale in what’s being dubbed GATCA. The OECD’s promoting it with the aim of curbing tax evasion through automatic exchange of information between FFIs across the globe.

If you need any more information please cal the office at 403-457-4142 or send me an email at sgreenley@ardentwealth.ca

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