What Canadians need to know about a new U.S. tax law

 

As Canadians we pay income tax based on our residency in Canada. In the United States Americans are taxed based on their status as Americans, no matter where in the world they work and live.

The U.S. government, concerned about tax evasion, passed the Foreign Account Tax Compliance Act (FATCA) into law in March 2010, and they will begin to implement it throughout the world starting July 1^st this year.

What does “implementing” FATCA mean to Canada?

It means Canadian banks will be asked to share information with the Internal Revenue Service about clients with U.S. connections. The intention is to catch intentional tax evaders, but it may also expose people who had no idea they were required to file in the U.S.

So whom does Uncle Sam consider to be American?

You have American citizenship if:

• You are an American who moved to Canada and retained U.S. citizenship.
• You were born in the U.S. to non-American parents, even if you left as a newborn and never applied for a social security number or passport, (unless you officially went through the process to renounce your American citizenship).
• One or both your parents are U.S. citizens and you were born in Canada, you were likely granted dual citizenship.

You also have to pay U.S. taxes if you are a U.S. Green Card holder, even if you currently live in Canada. You may also be affected if you live in the U.S. for an extended period each year.

U.S. Citizens are also required to report gains in “offshore trusts” which under the IRS definition includes RDSPs, RESPS, and TFSAs

The good news is that a tax treaty between the U.S. and Canada often means relief from paying taxes twice. The bad news is that even if you won’t owe taxes, you still have to go through the process of filing which can be expensive. Ignoring the situation should not be an option. While many people may have flown intentionally or unintentionally under the U.S. tax radar for many years, FATCA will change that, and the financial penalties for not filing will be costly.

If you or someone you know will need to file with the IRS, we suggest you seek assistance from a cross border tax specialist.

If you would like to read a more about FATCA click here.