The Internal Revenue Service (IRS) in the United States has finally announced clear guidelines for U.S. citizens who live in Canada and are late on their tax-filing requirements. These new guidelines are proposed to take effect Sept. 1, 2012.
Good news for U.S. citizens living in Canada is those who are late on their required tax filings will generally not be assessed the available extra penalties, or lose out on the exemptions that allow them to minimize U.S. taxes, provided they fit certain criteria.
Recall that anyone who is a U.S. citizen or green-card holder (even if born in Canada to U.S. parents, or "accidentally" born in the United States because parents were travelling or because the nearest hospital was in the U.S. and even if absent from the U.S. for 20 or 30 years) has a perpetual obligation to file U.S. tax returns.
Canada and other countries tax on residency. That means only citizens who are deemed tax residents of Canada have to file a Canadian tax return.
The United States taxes based on citizenship. This means U.S. citizens around the world are required to file a U.S. tax return and a Report of Foreign Bank and Financial Accounts (FBAR).
Many U.S. citizens who live in Canada -- many of whom have also become Canadian citizens -- have been unaware of this requirement, which has always existed. As a result, many did not file the required information returns. That makes them "delinquent."
Most U.S. citizens who kept up to date on their filings did not owe much -- or any -- tax to the IRS. The amount of Canadian tax they paid was recognized as a credit and usually offset any U.S. tax. (In fact, most got refunds in 2009, thanks to a stimulus program that paid cash to all U.S. citizens filing tax returns!)
As these laws became better known over the last two years, it also became clear the standard IRS regulations -- designed to deter tax evaders -- can impose huge fines and penalties on U.S. citizens who do not file tax returns, plus separate fines and penalties for citizens who hide foreign bank and investment accounts. (You guessed it -- Canadian accounts are looked on as foreign accounts, and lumped together with secret Swiss bank accounts.)
The new guidelines can be found at www.irs.gov/businesses/small/international/article/0,,id256772,00.html . I thank U.S. tax specialist Christa Walkden of MNP in Winnipeg for passing this news on to me.
The IRS says unpaid taxes, plus interest and penalties on those taxes, will still be due, but the big fines for non-compliance will be waived for taxpayers with "low compliance risk," defined as "simple returns with little or no tax owing."
In this case, three years of tax returns and six years of FBARs will be required, along with payment of any taxes and interest, a statement (subject to perjury penalties) stating why the filings are late, and further information about compliance risk that will be announced later this summer.
This is welcome news for U.S. citizens living in Canada, even those who have already caught up on late filings. Although there will be still be substantial expense for most of them in having tax and FBAR returns prepared, at least there is some certainly penalties designed to deter criminals will not be arbitrarily imposed on law-abiding people who were simply unaware of the requirements of a complex tax code.
I'm sure it's just coincidence the IRS made this announcement leading up to Canada Day, but Finance Minister Jim Flaherty is pleased. He deserves some credit for this, having made strong public representations to the U.S. government on the unfairness of the current situation.
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If you are looking for a high-energy classic rock start to the Canada Day long weekend, join my band Highway 59 at the King's Head Pub tonight. Have an afternoon nap then come out and join us for some serious dancing!
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).