US citizens in Canada get a small break until July 1, 2014
Posted October 9th 2013
The United States Treasury Department announced recently that the Internal Revenue Agency (IRS) will delay the implementation of the 2010 Foreign Account Compliance Tax Act (FACTA) law until July 1, 2014. For most Canadians there is no impact, but some U.S. citizens living in Canada need to pay attention.
The 2010 FACTA law requires banks to withhold 30 percent from certain U.S.-connected payments. It kicks in if a U.S. citizen does not disclose complete account information to the IRS.
FACTA also requires foreign banking institutions to report financial accounts held by U.S. citizens to the IRS. Beginning in 2011, U.S. citizens with non-U.S. bank accounts have been required to file Form 8938 to report total foreign financial assets, loans and shareholdings over certain limitations, and Form 8621 for Canadian mutual funds. Failure to file the right forms can lead to fines up to $50,000, with potential additional penalties under the Banks Secrecy Act of 1970.
Some financial institutions in Canada, including the Toronto Dominion Bank, feel the FACTA law is too complex. The extension gives banks time to comply.
The IRS also requires U.S. citizens to file U.S. tax returns, even if they did not earn income in the U.S. In many cases, U.S. citizens living abroad don’t realize they still have tax obligations. If you are a U.S. citizen living in Canada, no matter how long you have been away from the U.S., the IRS expects you to file a 1040 tax return every year if you meet the filing requirements. This also applies to naturalized U.S. citizens. Green card holders may also be required to file, even if the permit has expired.
Canadian snowbirds also need to pay attention, as the IRS rules depend on “substantial presence” in the U.S. The magic number is 183 days for the current and previous two years, using a formula set by the IRS. These days do not need to be consecutive. If you have met the “substantial presence” test, you are considered a resident alien and are required to file a 1040 form, unless you can claim a treaty exemption. You still need to file a Foreign Bank Account Report (FBAR).
The IRS efforts are designed to ensure the U.S. government is collecting tax on the income being earned by U.S. citizens living around the world and find assets being hidden offshore. Unlike the Canadian residency-based tax system, the U. S. bases its taxes on citizenship as well as residency. Only those who renounced their citizenship or returned green cards correctly when they left the country are no longer accountable for U.S. taxes.
According to the Federal Register, the number of expatriates renouncing U.S. citizenship climbed by more than 700 percent in the first six months of 2013 compared to 2008, which was before this law was considered. Renouncing citizenship is not an easy task. You must file tax forms, pay a fee, appear at a U.S. consulate, file Form 8854 and conduct an exit interview with a U.S. official. However, you must be tax- compliant for the past five years to renounce your U.S. citizenship. Also, consider how many days you may spend in the U.S. per year and how often you travel there. If you are in the U.S. for 30 days or more in any of the subsequent 10 years after you renounce, you may be considered a U.S. tax resident again.
Many U.S. citizens living in Canada are watching these developments with interest and if you have not yet taken measures to become compliant with the IRS now is the time to look into it. Though July 1, 2014 seems far away, you should be proactive rather than waiting for the IRS to contact you.
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