The US Foreign Account Tax Compliance Act (FATCA) has generated a lot of attention in Canada. It recently became Canadian law, as a part of the 2014 federal budget. FATCA requires Canadian financial institutions to send information about their US account holders to the Canada Revenue Agency, which will, in turn, send the information to the IRS.
FATCA did not create the obligation for US citizens and certain US Greencard holders anywhere in the world to file tax returns – those have existed for over 100 years. FATCA does make these obligations more pressing, because the IRS will soon have information on US citizens in Canada.
FATCA, very understandably, frightens people.
This is the first in a series of columns which will try to help US citizens living in Canada understand their tax obligations in this post-FATCA world.
For now, there is no need for panic. The IRS is not coming to seize your house. In a future column, I will explain exactly what enforcement powers the IRS has over US citizens in Canada. Panic may not be warranted, but the cautious route is to become compliant – if only to later give up your US citizenship (a topic for a future column). Even if you choose not to comply — not recommended — you should be aware of the risks you are taking.
To get on the IRS’s good side, you can take advantage of an amnesty program called the streamlined process, which helps US citizens in Canada (and elsewhere) catch up on overdue tax returns without fear of penalties.
To take advantage of the streamlined process, you must:
- Have been outside of the United States for at least 330 days during at least one of the last three years and during that time have not lived in the country;
- File complete US tax returns for the three most recent tax years;
- File 6 years of the FBAR form electronically. The FBAR form is required if at any point during the tax year you had more than USD $10,000 in foreign bank accounts;
- Certify that your failure to file the required US tax forms was not intentional.
US citizens in Canada are only subject to US federal tax. Canadian federal and provincial tax rates are generally higher than the US federal rate, and the Canadian taxes you pay are credited against your US taxes. Unless you have US source income, most US citizens in Canada will not owe anything. As such, for most people getting caught up just means filing some paperwork.
However, the paperwork can be daunting. Currently, there isn’t any specialized tax software designed to help you. But some American tax software, such as Turbo Tax, can be adapted to suit your needs. For those with simple financial circumstances, there are self-help books available. For those with more complicated financial situations, there are many accountants at many different price levels who specialize in US tax returns. As with everything, those with more expertise and experience tend to charge more. A prospective accountant should be able to give you a quote, so shop around. Living in a post-FATCA world complicates life for dual citizens, but with some early attention, these problems can be solved before they cause more headaches.