Many Canadian expatriates are familiar with United States income taxation of residents on their worldwide income. One can become a U.S. resident for this purpose one of two ways: under the “green card test” pursuant to which one becomes a U.S. tax resident upon becoming a lawful permanent resident of the U.S. (i.e., obtaining a green card), or under the “substantial presence test” pursuant to which one becomes a U.S. tax resident through physical presence in the U.S. for a number of days during the year and the prior 2 years which when adding the days spent in the U.S. in the current year, 1/3 of the days spent in the immediately preceding year and 1/6 of the number of days spent in the second preceding year, equals or exceeds 183. A “closer connection” test may prevent U.S. residence under the substantial presence test for expatriates in the U.S. fewer than 183 days during the year. In addition, the U.S.-Canada Income Tax Treaty provides a “tie-breaker rule” for dual U.S. — Canadian residents. Once you are treated as a U.S. tax resident, you become subject to U.S. income tax on your worldwide income. What you might not be as familiar with are duplicative filing requirements that you become subject to in order to report certain foreign financial assets once you become a U.S tax resident. First, a United States person, which includes a U.S. resident for income tax purposes, that has a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 during the calendar year, must file Form TD F 90-22.1, Report Foreign Bank and Financial Accounts (commonly known as the “FBAR,” short for Foreign Bank Account Report). For this purpose, a “financial account” includes a bank account, securities or brokerage account. It also includes commodities futures or options account, an insurance policy or annuity with a cash value and shares in a mutual fund or similar pooled fund. A “foreign financial account” is a financial account located outside the U.S. It includes an account with a branch of a U.S. bank located outside the U.S. You would have a financial interest in an account if you are the owner of record or holder of legal title over the account or an agent acting on your behalf is the owner of record or holder of legal title over the account. You can have a financial interest if in an account if you own more than 50% of a corporation, partnership or other entity that is the owner of record or holder of legal title over the account. You also can have a financial interest by virtue of being treated as the owner of a trust or by having a greater than 50% beneficial interest in a trust that is the owner of record or holder of legal title over the account. You generally would have signature authority if you have authority to control the disposition of assets held in the account by direct communication (whether in writing or otherwise) with the financial institution that maintains the account. You should note that you could potentially have signature authority over an account by being an officer or employee of an entity that owns the account. If you are required to file the FBAR, it must be received by the IRS on or before June 30 of the year following the calendar year being reported. The penalties for failing to file the FBAR are severe. Absent reasonable cause, a civil penalty of up to $10,000 may apply for failure to properly file this form. The penalty increases to the greater of $100,000 or 50% of the balance in the account at the time of the violation in case of a willful failure. Under a recently announced voluntary disclosure initiative, taxpayers with undisclosed foreign accounts, income or assets can come forward voluntarily and be subject to reduced penalties and avoid criminal prosecution.
Second, beginning this year (generally for the 2011 calendar year), a specified individual (including a U.S. citizens or U.S. tax resident) who holds an interest in “specified foreign financial assets” having an aggregate value in excess of $50,000 on the last day of the year or $75,000 at any time during the year (or $100,000 and $150,000, respectively for married taxpayers filing jointly) must report such assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets to be attached to the individual’s U.S. income tax return. The definition of “specified foreign financial asset” is broader than the definition of “foreign financial account” under the FBAR rules. A “specified financial asset” includes a depository or custodial account maintained by a foreign financial institution. It also includes the following assets held for investment and not in a financial account: stock issued by a foreign corporation; interests in foreign partnerships; notes, bonds, or other indebtedness issued by a foreign person; interests in a foreign trust or estate, swaps, options, derivatives, etc., with a foreign counterparty. Further, a “specified financial asset” includes an interest in a foreign pension or deferred compensation plan but does not include an interest in social security, social insurance, or similar program sponsored by a foreign government. Significant penalties apply for failure to file. The initial penalty for failure to file is $10,000. If the failure continues for more than 90 days after the IRS mails notice of the individual’s failure to file, an additional penalty of $10,000 for each 30-day period (or fraction thereof) following the expiration of the 90-day period (up to a maximum of $50,000). There is again a reasonable cause exception.
Beginning in 2014 (for calendar year 2013), foreign financial institutions will be required to report to the IRS information regarding their U.S. account holders or face 30% withholding on certain U.S. source income. Guidance regarding these new requirements is still being developed. You may receive a request from non-U.S. banks or financial institutions for further documentation if your accounts have certain US. indicia. Some countries will enter into agreements with the U.S. to collect this information from their financial institutions and report to the IRS. This reporting does not relieve you of the requirements of filing FBARs and/or Forms
8938 should they apply.
Expatriates with assets in Canada or elsewhere need to be cognizant of their U.S. reporting requirements or work with tax professionals who are. If U.S. reporting requirements applied in the past and you failed to comply, you should contact your U.S. tax advisor to determine the best course of action.
Circular 230 Notice: In order for us to comply with certain U.S. Treasury regulations, unless expressly stated otherwise, any U.S. federal tax advice that may be contained in this written or electronic communication, including any attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. federal taxing authority or agency or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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