Close to one million American expatriates and dual citizens live in Canada, many of whom haven’t worked, lived, or even stepped foot in the U.S. for years. Many of them don’t report their income to the IRS, mistakenly believing that they don’t have to because they don’t owe the IRS any taxes. But as of July 1, 2014, the CRA will begin collecting and sharing with the IRS information on any “U.S. person” with accounts in a Canadian financial institution. While the responsibility for compliance falls mainly on financial institutions—with minimal requirements on individuals—it is nonetheless important that people who may be affected by FATCA know the terms of the law and what it means for them.
What exactly is FATCA?
In 2010, the U.S. Congress passed the Foreign Account Tax Compliance Act (FATCA) to ensure diligent reporting of overseas income by “U.S. persons.” On February 5, 2014—and in response to growing concerns that allowing the IRS to directly collect personal information on persons in Canada would pose grave privacy and jurisdictional issues—the Canadian government entered into a bilateral agreement with the U.S. under the Canada-US Tax Treaty to incorporate the provisions of FATCA into the Canadian Income Tax Act. Under FATCA, Canadian financial institutions will report relevant information on accounts of U.S. persons to the CRA, which will exchange the information with the IRS through the provisions of the Canada –U.S. Tax Treaty. Canadian authorities will in this way review and vet any information passed to the IRS to ensure that all Canadian privacy laws are respected.
How does FATCA work?
With the adoption of the terms of FATCA into the Income Tax Act, all Canadian financial institutions must review new or existing client and account information to determine if any of their clientele are U.S. persons and remit the necessary information to the CRA.
Even if you aren’t a U.S. citizen or resident, you can be caught by the provisions of FATCA. Someone is considered a U.S person if they are:
- a U.S. citizen living in Canada or anywhere outside the United States;
- a lawful resident of the United States (e.g. Green Card Holder);
- a person residing in the United States; or
- a person holding certain US investments.
However, someone may be considered a U.S. person if they spend a considerable time in the U.S. on a recurring yearly basis—regardless of whether they fit into one of the above categories.
How will FATCA impact individuals?
For those who are not U.S. persons, business will continue as usual. FATCA will also have little impact on those who are U.S. persons—provided they are already compliant with US tax laws. The actual reporting requirements under FATCA and its Canadian counterpart fall on the financial institutions and should only be cause for concern if something is not already properly disclosed. Otherwise, a U.S. person need only alert their financial institution that they are such, if the institution does not already possess that information.
What financial accounts are subject to FATCA?
Under FATCA, Canadian financial institutions will have to report information relating to most types of financial accounts, such as bank, mutual fund, and brokerage accounts, and some insurance policies that have an investment or savings component. While certain registered plans—such as Tax Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), and Registered Pension Plans (RPPs)—are exempt from the reporting requirements, U.S. persons must still report these accounts if they hold more than $50,000. U.S. persons must also still report any income earned from these instruments on their Canadian and American tax returns.
What information is actually being exchanged?
Under FATCA, financial institutions will have to report and CRA will submit the following information to the IRS:
- Identifying information of the account holder (name, address, birth date);
- Account number and balance as of the end of the year;
- Amounts paid or credited to the account.
Non-U.S. persons with U.S. spouses will also have to report any joint accounts. According to the CRA, if any account has been associated with a U.S. person, information regarding the account will be forwarded to the IRS. However, none of the personal information of the non-U.S. persons associated with the account will be released to the IRS.
Under the law as it stands, financial institutions are not obliged to alert customers who have had their information shared, although those identified as U.S. persons should assume that their information has been shared. However, financial institutions are legally obliged to allow account holders to access the personal information that has been exchanged with the IRS if they request it.
The final word
FATCA, although originally viewed as a gross intrusion into the information and finances of Americans living abroad, in fact has minimal implications for individuals. For most, it will be business as usual—one will simply have to alert their financial institution that they may qualify as a U.S. person. For more information about FATCA and its ramifications for those in Canada, please see the CRA’s information guide.
By Eldad Gerb and Ira Marcovitch, Summer Law Student
Republished with permission from Devry Smith Frank LLP