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Americans in Canada should seek tax advice on new FATCA rules

With a legal challenge denied and a new cross-border tax agreement to exchange financial information now in place, American citizens resident in Canada should be sure to seek tax advice before the 2016 filing deadline, says Toronto tax litigation lawyer David J. Rotfleisch.

The U.S. Foreign Account Tax Compliance Act (FATCA) is designed to target tax non-compliance by U.S. taxpayers with foreign accounts, according to the U.S. Internal Revenue Service (IRS).

As Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation explains, the act requires U.S. persons holding reportable accounts at foreign financial institutions to report information on form 8938 attached to their annual tax return. FATCA requires non-U.S. banks provide information about U.S. citizens to the IRS. 

"Canadian banks are prevented by Canadian privacy laws from doing so. FATCA imposes a 30 per cent withholding tax on foreign financial institutions that do not meet the reporting requirements."

The IRS says that it met a Sept. 30 deadline to begin exchanging financial account information with foreign tax administrators, including the Canada Revenue Agency (CRA).

“Since the U.S. taxes based on citizenship, and also imposes financial information reporting obligations with large fines for non-compliance, these U.S. citizens with no U.S. nexus now face IRS penalties and enforcement. Regardless of whether any tax is due, the U.S. requires extensive tax and asset reporting documentation, for which non-compliance attracts extensive penalties,” says Rotfleisch.

Failure to comply could result in fines of up to $50,000, and the CRA will enforce IRS penalties under the treaty, he adds.

In Hillis v. Canada (Attorney General), two dual citizens recently challenged the disclosure of personal information under the agreement as unconstitutional, and also sought a permanent prohibitive injunction preventing the collection and disclosure of taxpayer information to the U.S.

But with respect to the injunction, the Federal Court of Canada ruled prior to the Sept. 30 deadline that “the collection and automatic disclosure of account holder information about U.S. reportable accounts ... is legally authorized in Canada by the provisions of the IGA [Intergovernmental Agreement] Implementation Act and Part XVIII of the ITA [Income Tax Act].”

The court also found that “the collection and automatic disclosure of any such information is not inconsistent with the provisions of the Canada-U.S. Tax Treaty, and does not otherwise violate section 241 of the ITA.” 

The decision says the court will rule on the constitutional issues at a later date.

As Rotfleisch says: “The fix agreed to by the Canadian government is to require Canadian banks to report to the CRA and the CRA to provide the information to the IRS under the Canada-U.S. tax treaty. The agreement is mutual in that the IRS is required to collect information for the CRA as well. Given this technical arrangement, I'm not surprised that the court found the exchange of information between CRA and the IRS to be valid.”

Because all U.S. citizens resident in Canada have tax filing obligations south of the border, Rotfleisch says they are faced with the option of complying with their filing obligations or renouncing U.S. citizenship, which also has potential U.S. tax implications.

“It would require them to complete years’ worth of disclosure statements and tax returns, and possibly be subject to various penalties for not having filed these statements and returns over the years,” he says.

Ultimately, Rotfleisch says, in terms of making sure that they do not run afoul of FATCA, the CRA and the IRS, Americans living in Canada should seek tax advice ahead of next year’s filing deadline.

A tax lawyer, he explains, can “advise as to their options and potential penalties.”

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