If you are a Canadian who is required to file a U.S. tax return and have offshore assets that you have not yet disclosed to the U.S. tax authorities, you may be able to take advantage of the Internal Revenue Service’s (IRS) newly expanded streamlined filing compliance procedures. Under these filing procedures, the IRS has agreed to waive penalties and provide amnesty to encourage U.S. taxpayers, including those living in Canada, to disclose any unreported offshore assets. The IRS also modified its Offshore Voluntary Disclosure Program.
The changes to the U.S. streamlined filing compliance procedures and Offshore Voluntary Disclosure Program are part of a wave of recent initiatives to gather additional and previously undisclosed information on U.S. taxpayers, including those living in Canada, such as accessing records from financial institutions and tracking entry and exit between countries.
In 2012, the IRS introduced streamlined procedures to help certain U.S. citizens or dual citizens, including accidental Americans, residing outside the United States who have not kept up with their U.S. tax filings to become compliant with their U.S. personal tax and other filing requirements without facing penalties or additional enforcement action. These procedures, which were available only to non-resident non-filers subjected taxpayer submissions to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.
Also in 2012, the IRS relaunched a special voluntary disclosure initiative for individuals to disclose offshore entities or accounts in January 2012. Taxpayers that intend to make a disclosure must file all original and amended tax returns and include payment for taxes, penalties and up to eight years of interest.
Under the program, taxpayers must pay a penalty of 27.5% of the highest aggregate balance in their foreign bank accounts and entities or value of foreign assets during the eight full tax years before the disclosure. Some taxpayers will be eligible for 5% or 12.5% penalties (i.e., for smaller offshore accounts or assets whose value did not exceed $75,000 in any calendar year subject to the program).
Filing compliance procedures
The IRS has expanded the streamlined procedures to apply to additional U.S. taxpayers living outside the country and certain U.S. taxpayers residing in the United States. For eligible U.S. taxpayers residing in Canada, the IRS announced that it will waive all penalties and eliminate the requirement that the taxpayer have $1,500 or less of unpaid tax per year to enroll in the program. As a result, taxpayers with a higher level of unpaid tax that could not apply for the streamlined procedures will now be able to benefit from the program. The changes also:
- Eliminate the required risk questionnaire
- Require taxpayers to certify that previous failures to comply with the rules were not “willful”.
Offshore Voluntary Disclosure Program
The IRS had modified its Offshore Voluntary Disclosure Program to:
- Require additional information from applicants
- Eliminate the existing reduced penalty for certain taxpayers
- Require taxpayers to submit all account statements and pay the offshore penalty at the time of application
- Enable taxpayers to submit voluminous records electronically (rather than on paper).
The IRS has also increased the offshore penalty to 50% (from 27.5%) where it's revealed that the IRS or Department of Justice is investigating a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement before a pre-clearance request is submitted.
Push for tax transparency
This initiative to help U.S. taxpayers living abroad catch up with their filing responsibilities comes just as the United States and Canada are making unprecedented attempts to gather information on taxpayers to ensure full compliance with the rules, including some of the following recent developments.
It is important to remember that these tax transparency initiatives are in addition to and on top of the existing tax compliance obligations such as withholding tax requirements on remuneration and payments for services to non-residents of Canada imposed under Regulation 102 and 105 of the Canadian Income Tax Act.
FATCA Information and reporting
Canadian financial institutions must now comply with new information gathering and reporting requirements under the U.S. Foreign Account Tax Compliance Act (FATCA), which became July 1, 2014. These rules include registering as participating foreign financial institutions with the IRS and ensuring on-boarding procedures comply with the intergovernmental agreement (IGA) on all new accounts opened on or after July 1, 2014, among other things. For details, see TaxNewsFlash-Canada 2014-33, “FATCA Now Law — Are You Ready for July 1, 2014? [PDF 41KB]”,
Canadian residents who spend a substantial portion of the year in the United States will now be tracked to determine whether your “physical presence” in the U.S. totals 183 days or more in the year (previously, taxpayers self-assessed this data). Travellers now have to swipe their passports on entry and exit of each country as part of the Entry-Exit Initiative and the Perimeter Security and Competitiveness Action Plan which came into effect June 30, 2014. If you are considered a U.S. resident for tax purposes, you must file tax returns and additional reporting forms in the United States, even if you are deemed resident in Canada. The cost of complying with filing requirements can be substantial. To make this determination, you must total up the number of days you spend in the U.S. in the current year, 1/3 of the days from the preceding year and 1/6 of the days from the second preceding year.
This Entry-Exit Initiative will also make it easier for the tax authorities to identify Canadian businesses providing services in the United States that may constitute a permanent establishment. Businesses providing services in the United States for more than 183 days in any twelve month period may be deemed to have a U.S. permanent establishment.
Filing in the U.S.
If you are a considered a Canada-U.S. dual citizen that resides in Canada, you are required to file an annual U.S tax return to report your global income under U.S. law. If the value of your financial accounts exceeds USD$10,000, you are also required to file Form FinCEN 114, "Report of Foreign Bank and Financial Accounts", each year with the IRS by June 30.
We can help
KPMG Canada’s experienced, multidisciplinary team of tax and advisory professionals can help you or your company meet all U.S. tax requirements. We provide advice to a wide range of financial services and general business organizations and can assist you to reduce the tax burden and enhance efficiencies. For more details, contact your KPMG adviser.
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Information is current to July 10, 2014. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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