IRS Amnesty Programs for Expats Living in Canada

IRS Amnesty Programs for Expats Living in Canada

There are an esti­mat­ed one mil­lion U.S. cit­i­zens liv­ing in Cana­da who have not been fil­ing U.S. tax returns and have since fall­en behind on their U.S. tax oblig­a­tions. The U.S. Depart­ment of Trea­sury and the Inter­nal Rev­enue Ser­vice (IRS) have estab­lished sev­er­al amnesty pro­grams that allow U.S. tax­pay­ers to catch up on delin­quent tax­es and For­eign Bank Account Report­ing (FBAR). The two most pop­u­lar tax amnesty pro­grams for Amer­i­cans resid­ing in Cana­da include the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures and the Off­shore Vol­un­tary Dis­clo­sure Pro­gram (OVDP). Both of these amnesty pro­grams allow U.S. cit­i­zens or green card hold­ers to file their delin­quent tax­es and dis­close unre­port­ed off­shore assets vol­un­tar­i­ly in order to become com­pli­ant with U.S. tax fil­ing and FBAR report­ing require­ments. Address­ing one’s non­com­pli­ance via one of the IRS amnesty pro­grams great­ly reduces or com­plete­ly elim­i­nates penal­ties for non­com­pli­ance, depend­ing on the cir­cum­stances and which pro­gram is used to ensure com­pli­ance. The Stream­lined Fil­ing Com­pli­ance Pro­ce­dures are avail­able to domes­tic tax­pay­ers (Stream­lined Domes­tic Off­shore Pro­ce­dures) and those who reside off­shore (out­side the Unit­ed States) (Stream­lined For­eign Off­shore Pro­ce­dures). The pro­grams are sim­i­lar, but Stream­lined Domes­tic Off­shore Pro­ce­dures come with a five (5) per­cent mis­cel­la­neous off­shore penal­ty. The IRS has recent­ly announced that one of these pro­grams, the OVDP, will be clos­ing on Sep­tem­ber 28, 2018. Although the IRS stat­ed that the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures would remain open, the IRS has indi­cat­ed that this pro­gram may also be shut down in the future. More impor­tant­ly, the IRS may once again change the terms of the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures, like it did in June 2014 – while some changes were pos­i­tive, many changes were unfa­vor­able to expats.

What Are My U.S. Tax Obligations As An American Residing in Canada?

As rel­e­vant to this note, U.S. tax fil­ing require­ments are based on U.S. cit­i­zen­ship. The Unit­ed States requires its cit­i­zens and per­ma­nent res­i­dents to file U.S. tax returns no mat­ter where they are liv­ing, sub­ject to applic­a­ble fil­ing thresh­olds. U.S. expats who reside in Cana­da are con­sid­ered to be U.S. res­i­dents for U.S. tax pur­pos­es and are sub­ject to U.S. tax on their world­wide income. More impor­tant­ly, they are also sub­ject to FBAR dis­clo­sure require­ments, sub­ject to the applic­a­ble thresh­olds. To pre­vent dou­ble tax­a­tion, the U.S. law allows its res­i­dents claim for­eign tax cred­it for tax­es paid in for­eign juris­dic­tions, such as Cana­da, sub­ject to cer­tain lim­i­ta­tions. The for­eign tax cred­it typ­i­cal­ly off­sets tax owing on the U.S. tax return because Cana­di­an indi­vid­ual income tax rates are gen­er­al­ly high­er than U.S indi­vid­ual income tax rates. Note that the U.S. tax return may still be required to be filed each year. In addi­tion, there are cer­tain trans­ac­tions or tax events that may lead to addi­tion­al U.S. tax, even though an indi­vid­ual paid her/his Cana­di­an tax­es. For exam­ple, this may occur due to mis­match of the tax treat­ment of a par­tic­u­lar item of income or tim­ing dif­fer­ence (tax defer­ral in Cana­da vs. cur­rent tax­a­tion in the Unit­ed States). Usu­al sus­pects include invest­ments in Cana­di­an mutu­al funds (that are gen­er­al­ly con­sid­ered Pas­sive For­eign Invest­ment Com­pa­nies (PFICs) for U.S. fed­er­al income tax pur­pos­es)) and Net Invest­ment Income Tax (NIIT) lia­bil­i­ty that is not cred­itable on one’s Cana­di­an tax return. Con­trary to com­mon mis­con­cep­tion, you are still required to file a U.S. tax return and report your world­wide income to the IRS if you have filed tax­es in Cana­da and if your income exceeds cer­tain thresh­old amount (a deter­mi­na­tion is made annu­al­ly; for exam­ple, the fil­ing thresh­old for a sin­gle fil­er in 2017 was US $10,400 (that includes stan­dard deduc­tion and per­son­al exemp­tion amount). For FBAR pur­pos­es, if in the aggre­gate the max­i­mum bal­ance or val­ue of your non‑U.S. accounts exceed­ed US $10,000 dur­ing any giv­en point in the tax year, you are also required to report your bank accounts or finan­cial inter­ests to the U.S. Depart­ment of Trea­sury. Note that if you met the thresh­old, you are required to dis­close all accounts, even those that have zero val­ue or bal­ance. In addi­tion to bank accounts, Cana­di­an res­i­dents must dis­close oth­er assets, such as Reg­is­tered Retire­ment Sav­ings Plan (RRSP). Addi­tion­al report­ing of cer­tain finan­cial assets and finan­cial inter­ests is required on FATCA form (Form 8938). Report­ing of for­eign accounts is known as FBAR (Report of For­eign Bank and Finan­cial Accounts). The FBAR form (Fin­CEN 114) is filed elec­tron­i­cal­ly sep­a­rate from your U.S. tax return. It is filed with the U.S. Depart­ment of Trea­sury The dead­line for fil­ing FBAR is April 17, 2018 (for the 2017 tax year); how­ev­er, there is cur­rent­ly an auto­mat­ic exten­sion to Octo­ber 15, 2018. FBAR dis­clo­sure does not per se lead to a tax lia­bil­i­ty. There is no tax asso­ci­at­ed with the FBAR, rather it is a report­ing require­ment. If the nec­es­sary report­ing is not made or made late, civ­il penal­ties may be imposed with the harsh­ness of applic­a­ble penal­ties depen­dent on will­ful vio­la­tion. For non-will­ful vio­la­tions, the penal­ty is US $10,000 per vio­la­tion. Will­ful vio­la­tions are sub­ject to US $100,000 penal­ty or the 50 per­cent of the max­i­mum high­est val­ue or bal­ance of the unre­port­ed accounts. They also may lead to crim­i­nal charges. No penal­ty is imposed for non-will­ful vio­la­tions when the tax­pay­er can show rea­son­able cause. The rea­son­able cause defense requires care­ful devel­op­ment and strat­e­gy.

What Types of Income Are Reportable?

U.S. Expats resid­ing in Cana­da must report all of their world­wide income annu­al­ly, regard­less of whether the income is has U.S. or for­eign source. In addi­tion to your U.S. source income, your U.S. income tax return should also include the fol­low­ing income items (the list is not exhaus­tive):

• Wages from your Cana­di­an employ­er;
• Self-employ­ment income earned in Cana­da;
• For­eign div­i­dends and inter­est income;
• Rental income from for­eign prop­er­ties;
• For­eign roy­al­ties;
• For­eign cap­i­tal gains or loss­es on stocks, bonds, real estate;
• For­eign pen­sion and social secu­ri­ty ben­e­fits;
• And any oth­er items of income

Tax Amnesty Programs For U.S. Citizens In Canada

As men­tioned above, the IRS offers U.S. expats the abil­i­ty to come for­ward and use tax amnesty pro­grams to clean up a non-com­pli­ant his­to­ry. There are two main amnesty pro­grams; The Stream­lined Fil­ing Com­pli­ance Pro­ce­dures are aimed towards tax­pay­ers who failed to dis­close their for­eign assets and accounts due to a non-will­ful con­duct. Mean­while the OVDP is pri­mar­i­ly for those tax­pay­ers who were aware of their U.S. tax fil­ing and FBAR report­ing oblig­a­tions, but failed to com­ply with those oblig­a­tions in a time­ly man­ner.

Streamlined Filing Compliance Procedures

These pro­ce­dures are designed for U.S. expats who have been delin­quent on their tax fil­ings, but can cer­ti­fy that their fail­ure to report income, pay tax­es and sub­mit any required tax infor­ma­tion, such as FBARs, was due to non-will­ful con­duct. Under this tax amnesty pro­gram, the tax­pay­er is required to:

• Sub­mit the pri­or three (3) years of tax returns, includ­ing required infor­ma­tion returns and pay the nec­es­sary tax;
• Report six(6) years of FBARs; and
• Sub­mit a non-will­ful cer­ti­fi­ca­tion that the fail­ure to file and report was due to non-will­ful con­duct. The cer­ti­fi­ca­tion also estab­lish­es the meet­ing of non-res­i­den­cy test under Stream­lined For­eign Off­shore Pro­ce­dures.

A delin­quent U.S. expat who com­plies with these pro­ce­dures will have to pay pre­vi­ous­ly unpaid tax­es with inter­est, but will not be sub­ject to any penal­ties if they are accept­ed into the pro­gram.

Offshore Voluntary Disclosure Program (OVDP)

While the OVDP does car­ry penal­ties, the penal­ties are sig­nif­i­cant­ly reduced from what tax­pay­ers could face if the IRS finds an expat’s delin­quen­cy before expat came for­ward on their own. The OVDP is designed for delin­quent expats who are con­cerned that their fail­ure to report income and fail­ure to dis­close for­eign finan­cial accounts might be viewed by the IRS as will­ful and, there­fore, seek to avoid harsh civ­il penal­ties and poten­tial crim­i­nal charges. The OVDP pro­vides pro­tec­tion from crim­i­nal lia­bil­i­ty and offers a “clo­sure” terms for resolv­ing civ­il tax oblig­a­tions and penal­ties (as a result of the OVDP, the tax­pay­er and the IRS enter into a clos­ing agree­ment, pro­vid­ed they reach an agree­ment under the OVDP). Under this pro­gram, the tax­pay­er is required to sub­mit: The eight (8) years of tax returns, includ­ing required infor­ma­tion returns; and eight (8) years of FBARs. A tax­pay­er who com­plies with the OVDP pro­gram will have to pay back tax­es with inter­est. In some cas­es, the set­tle­ment that has been offered under the OVDP may be too severe for the tax­pay­er and they may con­sid­er “opt­ing out” or with­draw­ing from the pro­gram. By doing so they agree to under­go a full and ordi­nary audit. In return for par­tic­i­pat­ing in the OVDP, the IRS would typ­i­cal­ly not rec­om­mend crim­i­nal pros­e­cu­tion. *If you are already under audit, you can no longer apply for any of the IRS tax amnesty pro­grams men­tioned above. You should con­tact a qual­i­fied U.S. tax advi­sor to review your options.

Take Advantage of Amnesty Programs While They’re Here

As stat­ed ear­li­er, the IRS has already indi­cat­ed that it intends to shut down the OVDP. The IRS spec­i­fied that entrance into the OVDP will still be allowed, but it requires a sub­mis­sion to be received or post­marked by the IRS by Sep­tem­ber 28, 2018 in its com­plete form. Although the IRS stat­ed that it does not plan on clos­ing the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures, it did point out that that amnesty pro­gram may close any time. Impor­tant­ly, there is no guar­an­tee that the IRS does not change the terms of the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures again. Just like they did in June of 2014. You can bet that any term changes would be less favor­able to delin­quent tax­pay­ers than those cur­rent­ly avail­able. Because of this uncer­tain­ty, if you are a delin­quent tax­pay­er liv­ing in Cana­da, it is cru­cial that you con­sid­er find­ing a qual­i­fied U.S. tax advi­sor to help you wipe clean your slate with the IRS — soon­er than lat­er. If your sit­u­a­tion is del­i­cate, talk to a U.S. tax attor­ney to ensure that your con­ver­sa­tion is pro­tect­ed by attor­ney-client priv­i­lege. The attor­ney can help you decide what your next steps should be under your par­tic­u­lar facts and cir­cum­stances. While Stream­lined Fil­ing Com­pli­ance Pro­ce­dures and the OVDP are the two main tax amnesty pro­grams, there are addi­tion­al options that may be more suit­able for delin­quent expats who do not fit with­in the scope of the two main pro­grams dis­cussed in this note. For exam­ple, there are spe­cial pro­grams and pro­ce­dure for those who have only failed to file FBARs or have failed to file an inter­na­tion­al infor­ma­tion­al return, for exam­ple, Form 5471, used to report the own­er­ship in a for­eign cor­po­ra­tion or Form 3520, used to report dis­tri­b­u­tions from for­eign trusts among oth­er report­ing trans­ac­tions. If you are a delin­quent tax­pay­er look­ing to clear your record, it is vital that you weigh and are aware of all of the options avail­able to you. Each of the pro­gram options has its advan­tages and dis­ad­van­tages, and choos­ing the best way for­ward requires a care­ful analy­sis of your par­tic­u­lar cir­cum­stances. Please reach out to a qual­i­fied U.S. tax advi­sor before it’s too late. The ever-increas­ing infor­ma­tion shar­ing between gov­ern­ments and finan­cial insti­tu­tions, as well as the ease with which the infor­ma­tion can be found in this dig­i­tal age, does not allow indi­vid­u­als to hide much longer.

Our experienced qualified U.S. tax advisors are available to discuss your options and to assist you in navigating each step of the coming into compliance process, while offering practical and high quality advise on the best strategy to become compliant with U.S. tax laws and to mitigate the applicable penalty exposure.