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The IRS Offshore Voluntary Disclosure Plan (OVDP) Expands Eligibility for Streamlined Version

August 28, 2014 By Cardinal Point Wealth

The IRS has recently expanded the eligibility requirements for streamlined OVDP. If you are a U.S. taxpayer with offshore accounts, the streamlined procedures could be beneficial for you, with some penalties waived.

To qualify for the streamlined procedures, you must certify that your conduct (not having reported foreign accounts) was “non-willful.” The IRS defines “non-willful” as negligent, inadvertent or due to a misunderstanding of the law.

Is this an opportunity to come into compliance in an organized, timely manner or, as is asked in this Forbes column, is it the government’s attempt “to entice unsuspecting taxpayers into placing their head onto the FBAR chopping block?”

Read the full article here.

Filed Under: Americans Living in Canada, Cross-border Tax Planning, lifestyle Tagged With: Americans living in Canada, Cross-border tax planning, FBAR, Offshore Voluntary Disclosure Program

FATCA Goes Live

July 1, 2014 By Cardinal Point Wealth

For more than two years, we’ve been covering the implementation of the Foreign Account Tax Compliance Act (FATCA) and all its implications. Well, the big day has arrived! FATCA takes effect on July 1st (on Canada Day, interestingly enough), and we’re catching you up on the good, the bad and the ugly by highlighting key coverage from our Press Room. We’re also waiting with bated breath to see how it all plays out…

In a nutshell, FATCA is the result of U.S. legislation designed to derail tax evasion by U.S. citizens and residents abroad and the international banking institutions in which they hold money. The Act is also intended to generate significant revenue by ensuring that the roughly 7 million Americans who live or work abroad become tax compliant with the Internal Revenue Service (IRS).

Without delay, here’s a roundup of everything you wanted to know about FATCA (but were afraid to ask):

  • “FATCA—Forget About Trusting Canada Again?” includes some of my most recent (and candid) thoughts on the subject. This article discusses whether Canada had a choice in complying with the Act, the impact on clients, and how advisors can best guide their clients.
  • Just in time for FATCA’s implementation, the I.R.S has launched a revised tax amnesty program that benefits Americans living in Canada.
  • In our News to Note section, we highlighted this piece on the logistical nightmare that is FATCA compliance.
  • One result of FATCA is that there are new rules for U.S. taxpayers holding mutual funds outside registered accounts. In this article, we look at the necessary forms to file and the consequences of this new rule.
  • In this video clip, I give Globe and Mail’s Rob Carrick an update on the FATCA-related IRS crackdown on Americans who live and work in Canada but haven’t been filing their annual tax returns.
  • In this article, my colleague John McCord discusses the importance of disclosing foreign-based accounts to the IRS if you’re an American expat—and how FATCA is behind it.

 If you have questions or concerns about FATCA and its potential impact on you, the cross-border specialists at Cardinal Point Wealth Management are here to help.

Filed Under: Americans Living in Canada, Articles, Canada-U.S. Financial Planning Articles, Cross-border Tax Planning, FATCA Tagged With: Americans living in Canada, Canada-U.S. financial planning, Cross-border tax planning, FATCA, Foreign Account Tax Compliance

FATCA—Forget About Trusting Canada Again?

June 26, 2014 By Cardinal Point Wealth

July 1, 2014 is supposed to be the celebration of Canada Day!. But on that day, the first phase of the dreaded U.S. legislation known as the Foreign Account Tax Compliance Act (FATCA) is to be implemented. For some Americans in Canada, this is not a cause for celebration.   Many Americans in Canada believe that this Act disregards all Canadian privacy laws and the Canadian Charter of Rights and imposes significant hardships on them and the financial institutions and advisors they maintain relationships with.   For the roughly 1 million Americans in Canada, FATCA might very well stand for: Forget About Trusting Canada Again!

Did Canada Really Have a Choice? 
In 2010, the U.S. Congress passed legislation and the provisions of FATCA as part of the Hiring Incentives to Restore Employment (HIRE) Act.   The Act was passed to help the struggling U.S. economy and as a means to circumvent the significant amount of tax evasion by U.S. citizens and residents abroad and the foreign financial institutions in which they may have held money.  Further, this Act was a means to generate additional revenue by forcing some 7 million Americans who live or work abroad into tax compliance with the Internal Revenue Service (IRS) by “coming clean” through a variety of programs that were established to encourage U.S. taxpayers to file their annual U.S. tax returns and related reporting requirements.  Since 2009, it is reported that more than 33,000 taxpayers have participated in these programs, with the IRS collecting more than $4.3 billion to date.

FATCA will now require non-U.S. financial institutions to provide the IRS with information related to a U.S. person’s bank, brokerage, mutual funds, insurance and other financial accounts. Failure to sign the Intergovernmental Agreement (IGA) with the United States government would have required non-U.S. financial institutions—known as Foreign Financial Institutions (FFIs)—to withhold 30% tax from any U.S. source income. Given the hundreds of millions of dollars traded between Canada and the United States on a daily basis by individuals and financial institutions, most countries around the world, including Canada, really did not have much choice but to sign and accept the IGA.

Canada’s largest bank, TD Canada Trust, expects the cost to comply with FATCA to be almost $100 million.  This amount will likely be similar for the other major Canadian banks and financial institutions.  These are massive numbers given that it has been reported that the IRS has only spent some $8.6 million in ramping up for FATCA.  Many are unsure as to whether the IRS is truly ready to take on this monumental global task.  As recently as May 2, 2014, the IRS released additional guidance in Notice 2014-33 that provides additional leniency for those financial institutions who have made “good faith” efforts in trying to register and comply with the FATCA regulations. Perhaps Catherine Sibelius, the former head of the failed Obamacare rollout, can help the IRS out given that she is currently out of a job?

According to the U.S. Department of Treasury website, some 60 countries have signed IGAs with the United States as of May 15, 2014.  Currently, there are 30 countries that have signed under the Model 1 and Model 2 IGAs. This list includes such perceived tax havens as the Cayman Islands, Guernsey, Bahamas, Liechtenstein and another major tax haven that has been used by many Americans in Canada: Canada!  However, the list presently does not include countries like China, Saudi Arabia and (surprise, surprise) Russia, which recently ended discussions with the U.S. related to its IGA.

On February 5th of this year, Canada signed the IGA with the United States government.    Effective on July 1st, the Canada Revenue Agency (CRA) will be obligated to inform the IRS about the financial accounts of U.S. persons in Canada. A U.S. person would be defined as a U.S. citizen, U.S. green card holder and/or someone who could conceivably meet the U.S. Substantial Presence Test.  As most advisers are aware, these individuals are required to file U.S. income tax returns on an annual basis and report worldwide income and additional reporting compliance requirements to the IRS.   Given that many Americans in Canada can utilize the Foreign Earned Exclusion (FEI) on Canadian employment income and foreign tax credits on their U.S. tax returns, in most cases U.S. persons might find that no additional U.S. tax is required to be paid. That being said, there are a host of other compliance and reporting requirements that are imposed on U.S. taxpayers who hold foreign accounts, including Canadian mutual funds, registered assets and Tax-Free Savings Accounts (TFSAs).   Further, with the passage of Obamacare last year and the imposition of the 3.8% Medicare surtax on net investment income, some Americans in Canada might be surprised to find their exposure to additional U.S. tax, beyond the use of the FEI and foreign tax credits.

Impact on Clients
As an advisor, it is important that you make your U.S. resident clients aware of the implications and reporting requirements under FATCA.   Many banks and financial custodians in Canada have already taken steps to become registered with the IRS.    In fact, many of you have already seen additional Know Your Client (KYC), Anti-Money Laundering (AML) and other documentation requirements for your U.S. resident clients. These requirements would include obtaining copies of the client’s U.S. passport and certification of U.S. tax status through the signing and retention of IRS Form W-9 or the signing off of IRS W-8BEN. Additionally, many Canadian financial institutions are also requiring new self-certification declarations for existing and new accounts.

Under the IGA, if a client account exceeds $50,000 (aggregated), the FFI is required to provide the following to CRA:

  1. “The name, address, and U.S. [Tax Identification Number] TIN of each Specified U.S. Person that is an Account Holder of such account;
  2. the account number (or functional equivalent in the absence of an account number);
  3. the name and identifying number of the Reporting Canadian Financial Institution;
  4. the account balance or value (including, in the case of a Cash Value Insurance Contract or Annuity Contract, the Cash Value or surrender value) as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure;
  5. in the case of any Custodial Account:
    1. the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and
    2. the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Reporting Canadian Financial Institution acted as a custodian, broker, nominee, or otherwise as an agent for the Account Holder;
  6. in the case of any Depository Account, the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period; and
  7. in the case of any account not described in subparagraph 2(a)(5) or 2(a)(6) of this Article, the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year or other appropriate reporting period.” i

If that is not “scary” enough, FFIs are also required to search for U.S. “Indicia.”  FFIs will be obligated to perform electronic records searches to determine:

  1. “Identification of the Account Holders as U.S. citizens or residents
  2. Unambiguous identification of a U.S. Place of birth
  3. Current US mailing or residence address (including US PO Box)
  4. Current telephone number
  5. Standing instructions to transfer funds to an account maintained in the U.S.
  6. Currently effective power of attorney or signatory authority granted to a person with a U.S. address; or
  7. An ‘in-care-of’ or ‘hold mail’ address that is the sole address the Reporting Canadian Financial Institution has on file for the Account Holder.” ii

In addition to the electronic and paper record searches described above, the Reporting Canadian Financial Institution must treat as a U.S. Reportable Account any High Value Account assigned to a relationship manager (including any Financial Accounts aggregated with such High Value Account) if the relationship manager has actual knowledge that the Account Holder is a Specified U.S. Person.  This is referred to as the “ACTUAL KNOWLEDGE” issue.

Notwithstanding the above under the Canadian IGA, registered savings plans (such as Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Educational Savings Plans (RESPs), TFSAs and certain other accounts under $50,000) are exempt from reporting by CRA to the IRS. Even though that is the case, Americans in Canada still have to report and pay taxes on TFSAs and RESPs and make elections to defer income tax on registered accounts.

Even though CRA will be providing this information to the IRS, Canadian authorities have indicated they will not be a party in collecting and assessing tax and penalties against Americans in Canada.

Advising Clients
If you have clients who are U.S. residents, it is extremely important that you encourage them to review the options available to them if they have not done so already. This would include ensuring that they are fully compliant with their U.S. tax filing obligations. This might be available under the two current programs offered by the IRS. The first is the more onerous and punitive Offshore Voluntary Disclosure Program.  The second is the Streamlined program available to qualifying taxpayers.

For clients who choose to become compliant, it is important that they recognize additional planning will need to be attended to with respect to their unique estate planning matters and the composition and structure of their nonregistered investment accounts.

Lastly, although many advisors are quick to suggest that U.S. persons should renounce or abandon their green cards as a means to avoid these rules, significant income tax and U.S. lifestyle implications could be created without proper advice.

Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years.  He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com


i Agreement between the Government of the United States of America and the Government of [FATCA Partner] to Improve International Tax Compliance and to Implement FATCA
ii Annex I: Due Diligence Obligations for Identifying and Reporting on U.S. Accounts and on Payments to Certain Nonparticipating Financial Institutions

Filed Under: Americans Living in Canada, Articles, Canada-U.S. Financial Planning Articles, Cross-border Tax Planning, FATCA Tagged With: Americans living in Canada, Canada-U.S. financial planning, Cross-border tax planning, FATCA, Foreign Account Tax Compliance Act

U.S. Announced Revised Tax Amnesty Program

June 23, 2014 By Cardinal Point Wealth

This article from Investment Executive discusses more lenient revisions to the IRS tax amnesty program, and Cardinal Point’s Terry Ritchie comments on the benefits for Americans living in Canada. The changes are designed to encourage expats to fulfill their tax filing obligations in the U.S. Revisions to the existing amnesty program include the elimination of both the $1,500 annual maximum for owed taxes and the risk questionnaire. In addition, taxpayers will be required to certify that their previous failure to comply was non-willful.

According to Ritchie, “The IRS has now recognized that the previous programs really did not fit the traditional American in Canada client who most advisors work with.” While tax agencies in general are never pleasant to deal with, Ritchie sees these changes as a welcome relief to Americans living in Canada and their tax professionals. The changes will take effect July 1, the same day that the U.S. Foreign Account Tax Compliance Act (FATCA) is launched. Ritchie adds, “With the full implementation of FATCA at the beginning of next month, Americans in Canada would be finding it more difficult to hide from the IRS.” Read the full article here.

Filed Under: Americans Living in Canada, Articles, Cross-border Tax Planning Tagged With: Americans living in Canada, Cross-border tax planning, FBAR, IRS tax amnesty program, Offshore Voluntary Disclosure Program

Americans Abroad Have Opportunity to File Previous Years U.S. Tax Returns

June 21, 2014 By Cardinal Point Wealth

This article from Cardinal Point’s Terry Ritchie highlights another opportunity for Americans abroad to voluntarily pay their U.S. taxes. The IRS is introducing improvements to two offshore account compliance programs in an effort to get non-filing and non-reporting expats to file U.S. tax returns, foreign bank reports and other IRS compliance forms from previous years. Since the first program’s inception, the IRS has collected $6.5 billion in taxes, interest and penalties from 45,00 taxpayers.

Program improvements include the elimination of the questionnaire and $1,500 threshold for the current Streamlined Program. Taxpayers must instead certify that failure to meet past filing and reporting obligations was due to “non-willful conduct.” In addition, Offshore Voluntary Disclosure Program (OVDP) changes include the elimination of the reduced penalty percentage for some taxpayers and a new requirement to submit all account statements. To read the full article and access more information on both programs, click here.

Filed Under: Americans Living in Canada, Articles, Cross-border Tax Planning, interviews Tagged With: Americans abroad to voluntarily pay their U.S. taxes, Americans living in Canada, Cross-border tax planning, FBAR, Offshore Voluntary Disclosure Program

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“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.