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Americans in Canada Face Strict New U.S. Financial Reporting Obligations

As part of a major U.S. tax compliance initiative to ensure proper reporting of income from offshore accounts, U.S. citizens living in the United States or abroad will be required to disclose much more detailed information to the IRS.  If you are a U.S. citizen currently residing in Canada or you have dual citizenship or a green card, you may have to disclose information about your non-U.S. bank and financial accounts (such as your Canadian investment accounts) to the IRS starting on your 2011 tax return. The new rules apply to individuals with specified foreign assets that have a combined value of more than US$50,000 at any time during the calendar year.

For purposes of these rules, specified foreign asset holdings could include non-U.S. bank and investment accounts, such as Canadian Registered Retirement Savings Plans (RRSP), Registered Education Savings Plans (RESP) and Tax-Free Savings Accounts (TFSA), shares in non-U.S. corporations such as Canadian corporations, interests in foreign entities and certain other types of foreign investments.

However, regulations may provide exceptions where holdings are already reported elsewhere. The draft version of new Form 8938, “Statement of Specified Foreign Financial Assets“ currently says that if you reported specified foreign financial assets on the following forms, you don’t have to include these assets on Form 8938 for the tax year:

·      Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”

·      Form 8621, “Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”

·      Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”

·      Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships”.

As part of this major compliance initiative, the IRS will also be collecting account information on U.S. individuals directly from non-U.S. financial institutions starting in 2013. As a result, all U.S. individuals holding foreign financial accounts (including Canadian accounts) caught under these rules should ensure they properly report this information in their 2011 annual U.S. tax returns.

Since the IRS will be accumulating account information from both non-U.S. financial institutions and account holders, any individual who has inadvertently not yet reported income from a foreign financial account on their U.S. personal tax return may wish to seriously consider taking part in the IRS’s Offshore Voluntary Disclosure Initiative to reduce penalties. To participate, you must file all original and amended tax returns and include payment for taxes, interest and penalties before August 31, 2011. We recommend seeking professional advice prior to taking part in the initiative.

Background
In an effort to curb perceived tax abuses by U.S. individuals with offshore bank accounts and investments, U.S. Congress passed the Hiring Incentives to Restore Employment Act (HIRE Act). These rules, signed into law on March 18, 2010, include requirements for both U.S. individuals and non-U.S. financial institutions.

Starting in 2011, these new rules require U.S. individuals to report specified foreign asset holdings of more than $50,000 to the IRS on their annual U.S. tax returns or face significant penalties. The rules for individuals are effective for tax years beginning after March 18, 2010 (i.e., 2011).

The Foreign Account Tax Compliance Act (FATCA), which was signed into law as part of the HIRE Act, also requires all non-U.S. financial institutions, including banks and brokers, to identify their U.S. customers and disclose specified account information to the IRS starting in 2013.

What is reportable?
U.S. citizens currently residing in Canada and individuals living in Canada with dual citizenship must now report the following foreign financial accounts as part of their annual U.S. income tax return:

·      Any depository, custodial, or other financial account maintained by a foreign financial institution (i.e., bank accounts, RRSPs)

·      Any stock or security issued by a person other than a U.S. individual

·      Any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. individual

·      Any interest in a foreign entity.

Note that individuals subject to U.S. taxation on these accounts that have paid tax to Canada on Canadian-sourced income can, in general, claim a foreign tax credit to offset U.S. tax on that income.

FBAR — Still required
Generally, U.S. individuals that are required to file information under the HIRE Act will also still have to file the U.S. information form “Report of Foreign Bank and Financial Accounts”, commonly referred to as FBAR. Generally, an FBAR form must be filed annually by any U.S. person who has a financial interest in or signature or other authority over any foreign financial account, where the aggregate value of the financial accounts exceeds US$10,000 at any time during the calendar year.

Canadian residents may face stiff U.S. penalties
The penalty for failing to report specified foreign accounts under the HIRE Act is US$10,000 for each year, with an additional penalty for ongoing failure to disclose.  The total penalty can be as high as $50,000 for each year.  Furthermore, the statute of limitations for reassessing a taxpayer for all tax returns for that year won’t begin to run until the form is filed.  However, the IRS has said it may waive penalties if reasonable cause can be shown.

Due to the severity of the penalties, all U.S. individuals holding specified foreign financial accounts with an aggregate value of more than US$50,000 should ensure they properly comply with these rules on their 2011 U.S. tax returns.

Source: KPMG - GAI

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