Last Wednesday, Canada became the most recent country to sign a bilateral tax disclosure agreement with the United States as a result of the Foreign Account Tax Compliance Act(FATCA) passed in 2010.
FATCA requires foreign financial institutions to report accounts held by U.S. citizens worth more than $50,000 to the IRS. Foreign financial institutions not in compliance with FATCA will be charged a 30% withholding tax. Canadian financial institutions had not yet joined FATCA though due to their concern about violating Canadian privacy laws by disclosing such information to the IRS.
Consequently, the Canadian Revenue Service has agreed to collect information regarding accounts held by U.S. citizens worth more than $50,000 from Canadian financial institutions and pass such information on to the IRS. In exchange, the IRS has agreed to disclose information regarding bank accounts held by Canadian citizens in the United States.
The following types of accounts and institutions will be exempt from FATCA under this agreement:
- Registered Retirement Savings Plans (RRSP)
- Registered Retirement Income Funds (RRIF)
- Registered Disability Savings Plans
- Tax-Free Savings Accounts
- Small financial institutions with assets amounting to less than $175 million
Readers of this article that have not previously reported Canadian RRSP’s and RRIF’s on TDF 90-22.1’s are cautioned that they still face potential FBAR Penalties and income tax evasion charges if they have not been consistently filing TDF90-22.1’s and 8891’s with the US government on an annual basis. If you have not, the answer is to make a 2012 OVDI. No additional income taxes, 20% penalties or FBAR penalties will apply if the IRS accepts you’re late filed TDF 90-22.1’s and 8891’s because of an acceptable reasonable cause explanation. See the following excerpts from the 2012 OVDI program Q and A’s for more information:
| 54. | I have a Canadian registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or other similar Canadian plan. I did not make a timely election pursuant to Article XVIII(7) of the U.S. – Canada income tax treaty to defer U.S. income tax on income earned by the RRSP or RRIF that has not been distributed, but I would now like to make an election. What should I do? | The answer depends upon whether you are participating in the OVDP announced by the IRS on January 9, 2012, the 2011 OVDI, or the 2009 OVDP.
Taxpayers who are participating in the OVDP announced by the IRS on January 9, 2012, should provide the following information (see FAQ 7):
Taxpayers who are participating in the 2011 OVDI should wait until they are contacted by an examiner about their case. Once they are contacted, they should inform the examiner of their desire to make an election and provide the examiner the information listed above. Taxpayers who participated in the 2009 OVDP whose cases have not been resolved and closed with a Form 906 closing agreement should inform the examiner working their case of their desire to make an election and provide the examiner the information listed above. Taxpayers who participated in the 2009 OVDP whose cases have been resolved and closed with a Form 906 closing agreement who believe that the account balance of the RRSP or RRIF was included in the calculation of the miscellaneous Title 26 offshore penalty and would now like to make an election should provide a statement to this effect including all pertinent contact information (name, address, SSN, home/cell phone numbers), the name of the examiner assigned to their case, and a copy of the closing agreement. This information should be sent to: Internal Revenue Service Upon receipt of this information, the case will be assigned to an examiner. The examiner will provide the taxpayer with further instructions on making the election. Making this election does not preclude an OVDP participant from electing to opt out of the civil settlement structure of the program. |
| 54.1 | If my election is granted, will the RRSP or RRIF balance be included in the offshore penalty base? | No. |
| 55. | I have a retirement or pension plan in a foreign country (other than a plan described in FAQ 54) that I do not believe should be included in the offshore penalty base. What should I do? | If you have a retirement or pension plan in a foreign country (other than a plan described in FAQ 54) for which you believe there is no U.S. reporting requirement and that you believe should not be included in the offshore penalty base, you should contact the OVDI hotline at (267) 941- 0020. |
Canadian financial institutions will begin collecting information this July and the Canadian Revenue Service will begin reporting to the IRS next year. This information may result in the civil and criminal prosecution of American citizens who have not disclosed foreign financial accounts exceeding $10,000 to the IRS for tax evasion.
If you are a dual citizen of the United States and Canada, you must still disclose your foreign accounts to the IRS. We can help you ensure you have correctly filed your Report of Foreign Bank and Financial Accounts (FBAR) forms with the IRS.
If you know you have an undisclosed Canadian financial account and have committed tax evasion, consider making a voluntary disclosure before it is too late.
