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The United States and Canada recently signed an Inter-Government Agreement (IGA) obliging Canadian banks to send information to the U.S. on bank accounts held by American citizens. The banks in Canada will send their information to the Canada Revenue Agency, who will then forward the data to the U.S. IRS. This IGA is meant to assist Canadian banks in complying with FATCA.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a provision under the Hire Act, which was passed by the U.S. Congress in March of 2010. Its purpose is to allow the IRS the ability to accurately determine the ownership of U.S. assets in foreign bank accounts. Since its passage in 2010, the IRS has been working on rules and guidelines for foreign institutions ahead of the official implementation date of July 1, 2014.
So far, the United States has signed IGAs (Inter-Government Agreements) with 21 countries. These agreements are designed to make it easier for signatories to comply with FATCA regulations. The main benefit for a partner country signing an IGA is their institutions are allowed to report information to their national tax authority rather than directly to the U.S. Internal Revenue Service. This should simplify the process for foreign banks and provide greater clarity on what it needed to comply with FATCA.
To date, the countries that have signed IGAs with the United States include:
- United Kingdom
- Cayman Islands
- Costa Rica
- The Netherlands
- Isle of Man
Negotiations are also being finalized with a handful of countries, including:
FATCAâ€™s Impact on Canadian Accounts
Because the United States and Canada are close neighbors with a fair amount of movement between the two countries, there are thousands of people that are considered dual citizens and are unaware that they may be required to file U.S. taxes. For example, there are Canadians that were born in the U.S. (thus deriving U.S. citizenship by birth), that moved to Canada when they were young. Having lived in Canada their entire adult lives, they never considered the possibility that they might be responsible to pay taxes to a country for which they never contributed (as an adult) to their economy.
Unfortunately, the United States government does not see it this way; the U.S. is one of the few countries in the world that taxes its citizens regardless of their residence. This means that Canadians that may have been born in the United States have always been responsible to file a U.S. tax return as long as they maintain their U.S. citizenship.
Speak With a U.S. Tax Professional
Clearly, the laws and regulations surrounding FATCA are quite complicated. In many cases, Americans with foreign accounts do not have any tax liability, but the failure to report the account (or file U.S. taxes at all) is a violation that may be subject to fines and penalties. If you are an American with a foreign bank account and are unsure how to proceed, speak to a U.S.-based professional accountant right away. The July 1 FATCA implementation date is looming, so it is important to takes steps immediately to get into compliance with this Act.