HillNotes

According to the Embassy of the United States in Ottawa, there are probably more than a million people with dual U.S.–Canadian citizenship living in Canada. For them, 15 June is an important day: it is the day on which U.S. tax-related forms must be filed, unless an extension has been given.

During the past year, a number of U.S. citizens have been in touch with Canadian parliamentarians, perhaps because of publicity in Canada about the U.S. Internal Revenue Service’s Offshore Voluntary Disclosure Initiative, which is now the Offshore Voluntary Disclosure Program. This program is designed to allow U.S. taxpayers to disclose any previously unreported offshore accounts.

Apparently, a number of American citizens living abroad, including those who are also Canadian citizens, did not realize the full range of their obligations in relation to the U.S. Internal Revenue Code and other tax-related statutes.

Taxation: Residency or citizenship?

Except in the United States, and perhaps in Eritrea where a “diaspora tax” is applied, personal taxes are paid based on residency, with individuals liable for taxation on their worldwide income.

In the United States, the liability for filing a U.S. personal income tax return is based on citizenship, a requirement that has existed since the Civil War. In certain circumstances, other forms must also be filed, in part in an effort to enable the Internal Revenue Service (IRS) to assess potential worldwide income earned by the taxpayer and to prevent tax evasion.

Nations may sign tax treaties to avoid double taxation as a means of ensuring that the same income is not taxed in each of two countries. Canada and the United States have such a treaty. It contains provisions designed to determine the country in which certain types of income should be taxed, and the manner in which that taxation should occur.

IRS requirements: What are they?

As noted, U.S. citizens living in Canada are required to file annual U.S. income tax returns and perhaps certain other information returns. In addition, they must report their worldwide income if they meet minimum requirements for their filing status and age.

Also, they are required to contact Canada’s federal government to determine whether they are required to file a Canadian tax return and pay Canadian taxes.

They may be able to elect to exclude some or all of their income earned in the United States or Canada, provided certain requirements are met, or to claim a foreign tax credit if Canadian income taxes are paid.

FBAR: What is it?

In some cases, U.S. citizens must also file a Report of Foreign Bank and Financial Accounts, commonly known as FBAR.

This report, which is required by the U.S. Bank Secrecy Act, obliges U.S. tax filers to disclose amounts in bank accounts, mutual funds and trusts in foreign countries with an aggregate value exceeding $10,000. FBAR information is managed by the U.S. Financial Crimes Enforcement Network.

FATCA: Potential new requirement?

Finally, there is a new requirement that may exist for some U.S. citizens under the U.S. Foreign Account Tax Compliance Act, known as FATCA.

FATCA was enacted in 2010 as part of the U.S. Hiring Incentives to Restore Employment (HIRE) Act. It requires U.S. taxpayers with assets in foreign jurisdictions that exceed $50,000 to report them to the IRS.

These foreign assets include amounts in bank accounts, stocks in foreign corporations, and beneficiary interests in a foreign retirement plan and in a foreign estate. This obligation begins with the 2011 taxation year for most tax filers.

When the rules have been finalized, FATCA will also require foreign financial institutions to report to the IRS about financial accounts held by a U.S. taxpayer or by foreign entities in which a U.S. taxpayer holds a substantial ownership interest.

Failure by these institutions to report will result in a withholding tax imposed on the income earned by that financial account.

FATCA: Some Canadian concerns?

Citizens, financial institutions and industry associations  (120 kB, 7 pages) in a number of countries around the world have expressed concerns to the United States about various elements of FATCA.

On 8 February 2012, the U.S. Treasury released a joint statement  (63 kB, 3 pages) with France, Germany, Italy, Spain, and the United Kingdom setting out a framework for a government-to-government approach to implementing FATCA.

The statement indicated that the framework is intended to address legal impediments to compliance, simplify practical implementation and reduce financial institutions’ costs.

Interested parties in Canada are continuing in their efforts to have their concerns about the compliance burden that may exist in relation to FATCA addressed.