More potential taxation woe is on tap for Americans residing in Canada, it appears.
By 2014, the U.S. Foreign Account Tax Compliant Act (FATCA) will come into effect in this country and it will allow the Internal Revenue Service (IRS) to demand that Canadian banks follow their Swiss counterparts and divulge the names and amount of holdings of their American customers. This law is designed to ensure that the estimated 1 million American citizens living in Canada pay taxes they owe to Uncle Sam.
"If you were born in the States but you grew up in Canada and even if you've never owned a U.S. passport or held a U.S. social insurance number, you're still subject to filing tax returns in the U.S. because you're an American citizen," explains Heather Segal, a partner at Toronto immigration law firm Guberman Garson.
As if things weren't quite confusing enough, there's also a difference between the IRS's definition of what an "American" is and the definition applied by the U.S. Citizenship and Immigration Service.
"Most people don't know that," she adds. "Individuals may want to find out if they've already lost their U.S. citizenship by virtue of an expatriating act because then they're not subject to the obligations of filing and it's retroactive."
Canadian banks will most certainly comply with FATCA too, remarks Kevyn Nightingale, a partner with MNP in Toronto who leads the U.S. Expatriate Taxation practice.
"It's not just American individuals but if an American individual who is a partner in a partnership or a shareholder in a corporation or a beneficiary of a trust, those accounts have to be reported to the IRS as well," he explains. "The IRS doesn't have direct compliance power over foreign banks. But what FATCA does if a bank doesn't comply is any American asset or income that that bank has, when they sell those assets or collect interest or dividends on them, the bank will be subjected to a 30 per cent holding tax on that payment.
"If you do nothing, you'll eventually be caught or you'll be cut out of the Canadian banking system."
"This is going to become a very big issue and the United States does not understand what they're dealing with in Canada," remarks Segal. "They're essentially blackmailing Canadian citizens."
Just to clarify, for Americans living in Canada who have dual U.S./Canadian citizenship and who pay Canadian taxes, they are also legally obliged to pay U.S. taxes.
"There are only two countries in the world whose citizens have to file and report worldwide income even if you don't live in that country and those countries are the United States and Eritrea," he says. "It's fully understandable that Americans wouldn't know that since virtually every other nation only taxes people who earn income in that nation or are residents of it."
While FATCA will not go into effect in Canada until 2014 what people affected by this law do between now and then could have an impact on them later. Thus, it's imperative for them to know the consequences of these actions now to safeguard their financial wellbeing.
"The IRS is doing a number of things to enforce compliance and they're worried a lot of Americans are hiding money in foreign banks," Nightingale says. "They've beefed up enforcement around the requirement of Americans to report the money they have in foreign banks.
"There's a new form that starts effective 2011. So as people file their tax return this spring, there's a new form to file that's much more detailed.