Canadian – American Dual Citizens and Taxation

It is likely that the majority of Canadian-American dual citizens became conscious of a shift in IRS policy and practice concerning US taxation during 2011. The practical application of this change by the IRS is that many citizens who had not been filing US income tax returns for many years, perhaps decades, for a multiplicity of reasons is that all Americans living and residing in Canada must now file annual US income tax returns in addition to their Canadian income tax forms. Filing a US tax return is required of each American1 even though there is no American tax payable, given that Canada has a higher taxation rate.

The reporting requirements for US taxes also include a secondary reporting obligation, i.e. the Foreign Bank Account Report (FBAR), and for the 2011 taxation year, a Form 8938, a part of the newly passed Foreign Account Tax Compliance Act (FATCA).

Minister of Finance James Flaherty made the following points in documents mailed to many individual Canadian-American citizens during the fall of 2011:

The penalty for not filing the FBAR is significant. Robert R. Wood, a contributor to Forbes online, in an April 2011 contribution states:

“As consumers we may be bombarded with how much fiber we need.  Yet FBARS may be more important than fiber!  The Report of Foreign Bank and Financial Accounts, also known as an FBAR or as Treasury Form TD F 90-22.1, has come out of the dusty stacks of federal form oblivion and into the front and center consciousness of thousands with bank accounts in foreign countries." Wood lists, among others, the following points:

  1. Annual Filing Required.  Unless you fall within the “at no time exceeding $10,000 category”–meaning all your foreign accounts in the aggregate did not exceed $10,000–you generally must file every year.
  2. Separate June 30 Filing.  FBARs are filed separate from tax returns.  They are due each June 30 for the preceding year.
  3. Receipt by Due Date.  Oddly, FBARs aren’t governed by the usual “mailing is filing” rule applicable to tax returns.  They aren’t technically tax returns, and are Treasury forms rather than being handled by the IRS.  Make sure your FBAR is received by June 30.
  4. No E-Filing.  Plus, despite the government’s obsession with e-filing of tax returns, FBARs can’t be e-filed.  Go figure.
  5. Who Must File?  U.S. taxpayers including citizens, residents, and entities that have foreign financial accounts totaling more than $10,000 at any point during the year.
  6. What’s an Account?  Foreign bank and brokerage accounts are generally included, as are offshore mutual funds or pooled investments.  However, hedge and private equity funds generally don’t count2.
  7. Account Exclusions.   Some types of accounts are not treated as foreign–an account with a financial institution in the U.S. isn’t “foreign.”  Likewise, an account with a U.S. institution that holds foreign assets doesn’t require a filing as long as you can’t directly access foreign assets maintained in a foreign institution.
  8. Many Entities Must File.  Many entities must file FBARs.  However, individual officers or employees who have signature authority over their employer’s foreign accounts need not personally maintain records of the accounts.  See Federal Register Feb. 24, 2011.
  9. FBAR Penalties.  The penalties for failure to file are considerably worse than tax penalties.  Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation.  But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation–and each year you didn’t file is a separate violation.
  10. Waiting for the Statute of Limitations.  Hoping you’re not caught -- or that if you are discovered you can plead innocence -- could require an awfully long wait (forever actually) before you’re truly in the clear.  If a tax return or FBAR is never filed, the statute of limitations never runs -- you can’t run out the clock. …
Canadian Minister of Finance Flaherty makes these points about the FBAR: The organization American Citizens Abroad is actively lobbying the American government for a repeal of the FATCA reporting requirement. Some Canadian NDP MPs from British Columbia are also actively calling on the Canadian government to take a proactive role by negotiating a true amnesty with respect to the FBAR reporting requirement along with exemptions for filing US tax returns for those who do not owe American taxes and have no American assets.

Currently there is no single organization or “voice” in Canada to represent law-abiding Canadian-American dual citizens caught in the US dragnet attempt to identify and prosecute tax evaders. On the surface, it appears that all dual citizens, whether tax evaders or not, are being “painted with the same brush.”

Canadian-American dual citizens, perhaps up to a million people in Canada, who are law-abiding citizens in Canada, require:

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1It is important to note that American citizenship must be clear and unequivocal in affected individuals. If you are not a US citizen, the requirements would not apply. For further clarification on the issue of citizenship, please see information at the following sites: 2For a more comprehensive and official description of what constitutes an account, e.g. mutual funds, RRSP’s, Registered Tax Savings Accounts, whole life insurance, see the IRS definition of  Financial Accounts.