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FATCA - Cardinal Point Wealth Management

Terry Ritchie, U.S. Expatriation and Your Dual Citizen Clients

November 13, 2014 By Cardinal Point Wealth

terry-video-shot-10-31-14

In this video, Terry Ritchie speaks with InvestmentExecutive.com’s Rudy Mezzetta about what U.S. citizens living abroad need to know when considering renouncing their U.S. citizenship. Though the numbers of expatriations are reaching historical highs, the process is not an easy one. After filing with the Department of Homeland Security, an individual wishing to renounce citizenship must meet with the consulate. Upon approval, the individual will be issued a CLN: Certificate of Loss of Nationality, from The State Department. This is not a quick process.

In terms of taxes, if you meet one of these rules—a worldwide net worth of $2 million or more, average annual net income tax of more than $150,000 (adjusted for inflation), or have not complied with all U.S. tax responsibilities in each of the five preceding years—you can be defined as a “covered expatriate.” CEs are subject to onerous tax considerations, including a “mark-to-market tax” that takes into account what you would net if you sold all of your assets upon expatriation, and then taxes this amount as a capital gain. Further implications include a tax on qualified assets and tax-deferred investment vehicles.
Finally, Terry reveals the #1 reason that Americans chose not to expatriate: the possibility (based on pending U.S. legislation) of not being allowed to return to the U.S. View the video here.

Filed Under: Articles, Canada-U.S. Financial Planning Articles, Cross-border Tax Planning, FATCA, Video Tagged With: Canada-U.S. financial planning, Cross-border tax planning, FATCA, Renouncing Citizenship, U.S. citizens living abroad

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

With Clock Ticking On FATCA, Financial Firms Brace For Headaches

April 12, 2014 By Cardinal Point Wealth

The clock is ticking down for financial institutions as the Foreign Account Tax Compliance Act (FATCA) takes effect this July. With three months to go until implementation, firms face significant logistical challenges to comply with FACTA. Compliance executives at this week’s OpRisk North America conference point to the challenge for multinational banks with legal entities in various jurisdictions, each with their own reporting requirements under FACTA. Intergovernmental agencies like the IRS are only adding to the challenge. The IRS has been slow to provide clear guidance, and other organizations worldwide look to the IRS to set the pace. Read the full article here.

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

Avoiding Cross-Border Financial Planning Pitfalls

March 28, 2014 By Cardinal Point Wealth

What’s the quickest way to turn traditional financial planning upside-down? Place a border in the middle of your tax and financial life. Financial, tax and estate planning can be a difficult undertaking for most individuals and couples.  Imagine the added complexities of planning between two countries; it requires proper advice to know where the minefields are.

iStock_000031180472Small Every day, we see the unique tax and wealth management challenges of those whose lives, assets and relationships straddle both sides of the U.S./Canadian border.  For some, assets remain in Canada while work and life are grounded in the U.S.  Other clients are U.S. citizens who live and work in Canada.  Some even own assets in one country even though they spend no time there.  Fortunately for our firm, my colleagues and I can closely identify because we live these types of lives.  We’ve spent years helping clients gain from the good and avoid the bad (or even ugly) outcomes of cross-border financial planning.

With recent gold medal victories for Canadian Olympic hockey teams (men and women), some might suggest Canadians shouldn’t fear the Americans anymore.  But with the passage of the Foreign Account Tax Compliance Act (FATCA) and the Act’s looming implementation later this year, there are plenty of Americans in Canada who live in fear of their own country.

U.S. citizens are considered to be residents of the U.S. for income, gift and estate tax purposes—regardless of where they live, die, generate income or hold assets.  Therefore, these individuals have an obligation to file U.S. income tax returns annually on worldwide income. Further, they must provide specific information on a variety of additional IRS compliance forms related to their ownership or interest in certain kinds of assets.  They also need to ensure that their estate planning is properly attended to given their U.S. citizenship or marriage to a U.S. citizen.

We often find that most domestic U.S. or Canadian-based financial advisors are not aware of the specific cross-border planning requirements these individuals or couples face.  It’s important to highlight a few common mistakes that are made in cross-border financial planning:

  • The Residency Factor: With the recent signing of FATCA, Americans who live and work abroad can no longer afford to keep their heads in the sand.  If you were born in the U.S., you are a U.S. resident for income, gift and estate tax purposes. If you were born in Canada to two U.S. citizen parents, you are a U.S. citizen.  If you were born in Canada to one U.S. citizen parent, you may be a U.S. citizen depending on certain conditions.  These so called “Accidental Americans” have their own set of planning requirements.
  • Parting with Your U.S. Citizenship: Given the greater planning complexities of U.S. citizens who live or work abroad, it’s not uncommon to hear the suggestion that they just give up their U.S. citizenship or return their Green Card.  These days, plenty of folks are doing just that.  In fact, the U.S. Treasury Department recently published the names of individuals in the Federal Registerwho renounced their U.S. citizenship or gave up their long-term residency by turning in their Green Cards.  This happened a record-breaking 2,999 times in 2013, a 221% increase over the prior year’s total.  Keep in mind, giving up one’s citizenship or Green Card is not an easy undertaking.  There can be some rather tedious and daunting income tax implications, and one’s ability to return to the U.S. down the road for lifestyle reasons could be compromised. 
  • Think Twice About U.S. and Canadian Tax Planning: Some traditional tax savings opportunities that might be utilized in Canada or the U.S. (or the specific state you reside in) may not work in cross-border situations and could even cause you greater problems.  For example, putting money in a Canadian retirement account, such as a Registered Retirement Savings Plan (RRSP), might reduce your Canadian tax, but it doesn’t do a thing to reduce your U.S. tax.  In fact, it might even cause you to pay additional U.S. tax as the level of net tax paid in Canada might be lower and not sufficient to reduce your overall U.S. tax.

Life across borders can catch you off guard and come at a hefty price if you aren’t prepared. In future columns, we’ll expand on the topics above and share other cross-border planning mistakes we often see in our practice.

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

Filed Under: Americans Living in Canada, Articles, Canada-U.S. Financial Planning Articles, FATCA, Immigration Tagged With: Americans living in Canada, Canada-U.S. financial planning, FATCA, Immigration

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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.