Larry Jacobson, Macdonald, Shymko & Company Ltd.
It is no secret that the United States taxes on citizenship, not residency. However, once we cross the border, the situation is the exact opposite. According to the Fair and Accurate Credit Transactions Act (FACTA), Canadian financial institutions will soon be required to report on the foreign assets of their American clients. Failure to report would result in a loss of their Intermediary Status, which no institution is willing to risk.
On the bright side, Americans need not be hesitant of filing their US Tax Returns (1040s). In most cases little or no U.S. taxes will be owed. Following the 1040 is a report of any foreign bank and investment account. Compliance requires Americans to disclose all foreign accounts by completing the Report of Foreign Banks and Financial Accounts (FBAR) and submitting this to the U.S. Department of the Treasury. The fines for non-compliance can be anywhere from $10,000 to $100,000! The do-nothing-approach will probably not be a successful strategy. In a situation like this, it is necessary to be proactive not reactive.
Do you own an apartment building in a privately held corporation? Be aware of the Passive Foreign Investment Company (PFIC) rules. Reporting can be a nightmare and you may be required to file a very expensive annual trust tax return. Consideration should be given to deregistering both TFSAs as well as RESPs, as all income earned is not sheltered from US taxation. However, by completing the prescribed form within your 1040, both RRSPs and or RRIFs are not subject to tax on earnings and are granted a deferred status. As an aside, owning mutual funds and some U.S. ETFs could be considered passive and face very negative income tax consequences whether owned inside or outside of an RRSP. Is there a short term easy fix? Yes, get rid of all your passive investments! Many of my U.S. clients had to do a complete restructuring and were forced by the sheer reporting requirements to dispose of assets (including commercial real estate) that they didn’t wish to sell.
OK, maybe you decide to renounce your U.S. citizenship and the problem is solved? Not so fast or easy– it will take 5-10 years and that will not remove your obligations for becoming tax compliant, along with the fines for non-compliant years.
Did I fail to mention U.S. Estate Taxes? Upon death, U.S. Estate Tax will apply to the fair market value of your worldwide assets for estates exceeding $5 million dollars. Let’s not forget gift taxes in your U.S. tax planning as well. Any gifts greater than $13,000 regardless of whom or why the gift was made is taxable by the donor.
I have had U.S. clients say “I refuse. Let them come and get me.” Be careful what you wish for. The Tax Treaty between the United States and Canada allows the IRS to compel CRA to help in enforcing the U.S. tax code for those U.S. taxpayers living in Canada. When crossing the border, your name is entered into their computer system with your place of birth. They will catch up to you.
What are your options?
1. Do nothing – be a ticking time bomb, or;
2. Be smart, be proactive and come up with a plan to become U.S. compliant.
Remember, if you do nothing you are facing a financial Armageddon.
A famous U.S. tax attorney was once asked, “When will all of this reporting end?”
His response, “A few years after you die.”
On June 26th the US announced an amnesty program for Americans living outside the US. To qualify, individuals must submit three years of back tax returns, six years of bank reporting forms (FBARs) and a signed letter explaining why they haven’t filed. These so called “low compliance risk “ taxpayers must have $1,500 a year or less in taxes owing in all three years. This will apply to about 90% of US expats living in Canada. Those expats who have more complicated financial affairs may not qualify. This is a wonderful opportunity to become compliant and my professional advice is “don’t walk but run” and get your US tax filings in order.
Larry Jacobson has been a partner, since 1973, in Vancouver’s venerable fee-only financial planning firm, Macdonald, Shymko & Company Ltd. (604-687-7966). His practice has evolved and is focused on high net worth family wealth planning and identifying problems and offering pragmatic solutions.
This article and the contents within should not be taken as US tax advice. One should always consult with a US tax expert regarding specific financial situations. The article and contents are the opinions of the author not Macdonald Shymko & Company Ltd.