Written on behalf of Feigenbaum Consulting
As we near the end of 2019 and the start of a new decade, CBC News is reporting that the number of Canadian bank records that are being shared with the Internal Revenue Service (IRS) has increased greatly.
This sharing of information is a result of the Foreign Account Tax Compliance Act, commonly referred to as FATCA, legislation which was introduced nearly 10 years ago and which has had a significant impact on tax planning for cross-border residents and taxpayers.
Foreign Account Tax Compliance Act (FATCA)
FATCA was passed on March 18, 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act. The legislation is intended to be a tool to assist the IRS in combating tax evasion by U.S. citizens and residents who have bank accounts and other financial assets offshore or in jurisdictions outside of the U.S. This includes Snowbirds and others who have assets on both sides of the border.
FATCA creates a dual obligation on both taxpayers and financial institutions:
- it requires certain financial institutions outside of the U.S. to report any accounts held by U.S. residents and U.S. citizens to the IRS. This includes the accounts of U.S. citizens that are residents or citizens of Canada; and
- it requires certain U.S. taxpayers themselves to report such assets to the IRS
There are serious penalties for not complying with these obligations.
Reporting Requirements for Financial Institutions
Financial institutions who are obligated to report include:
- investment entities;
- brokers; and
- certain insurance companies.
If a financial institution is not compliant with its obligations under FATCA, the legislation obligates “U.S. payors” that are making certain payments of U.S. based income to the non-compliant financial institution to withhold a tax equal to 30% of the payment. Payors include corporations and others who pay amounts such as dividends or interest.
Reporting by U.S. Taxpayers Holding Foreign Financial Assets
FATCA requires certain U.S. taxpayers who have offshore financial assets with an aggregate value of at least $50,000 to report information about those assets on a specific form, which must be included with the taxpayer’s annual income tax return (with some exceptions). This reporting threshold is higher for some taxpayers, including:
- married taxpayers filing a joint annual income tax return; and
- certain taxpayers living in a foreign country.
Sharing of Canadian Bank Account Information with the U.S. Has Increased
According to CBC News, the CRA sent 900,000 financial records of Canadian residents to the IRS in the last quarter of 2018: more than 1/3 more than it had provided in 2017.
For FATCA compliance purposes, Canadian financial institutions flag certain accounts to the CRA, and then the CRA sends that information to the IRS once a year. This information includes a taxpayers name, addresses, account numbers, account balances, interest payments, dividends as well as other other income.
The number of flagged accounts has been on the rise since FATCA was implemented:
- 150,000 records were shared in 2014;
- 300,000 records were shared in 2015;
- 600,000 records were shared in 2016.
In total, the CRA has provided the IRS with more than 2.5 million records of Canadian taxpayers who may now also be subject to U.S. taxes.
Canadians whose account information is shared with the IRS are not automatically notified by either their financial institution doing the reporting or the CRA.
FATCA is a reciprocal agreement, which means that the IRS is also supposed to send information about U.S. bank accounts to the CRA. However, according to CBC News, the CRA has not revealed how many records it has received from the IRS, noting that such data is “treaty-protected information” subject to confidentiality provisions.
The CRA’s Response
A CRA spokesperson told the CBC that the agency does not know why the number of accounts being flagged by Canadian financial institutions has been increasing.
The spokesperson noted that the agency is both analyzing the data to gain a better understanding in the growth of the number of records being flagged to the CRA and the way in which the information is being collected.
FATCA Subject to a Number of Legal Challenges
Since its introduction, FATCA has been subject to a number of legal challenges, both in Canada as well as in the U.K. and E.U.
Earlier this year, the Federal Court of Canada found that FATCA does not violate Canada’s Charter of Rights and Freedoms. Since that decision was issued, the two individuals who filed the original challenge have launched an appeal. The two appellants are being supported by the Alliance for the Defence of Canadian Sovereignty (ADCS), a group which has been vocal in running an anti-FATCA campaign.
Similar court challenges to the inter-jurisdictional sharing of banking information have also been launched in the United Kingdom and the European Union.
How Can Feigenbaum Law Help?
At Feigenbaum Law, we offer cross-border tax and legal solutions. Our unique practice brings together broad experience in U.S. and Canadian law, as well as Canadian and U.S. tax and accounting specialties to provide guidance and proactive planning services to individuals and corporations.
Our ultimate goal is to create the best tax strategy possible for our clients. We work with you to create a personalized solution that will streamline your compliance requirements and reduce your tax burden. Our focus is complex matters related to tax planning for individuals with high net-worth and whose assets are in multiple jurisdictions.
Our Cross-Border Services
Our talented team, led by Mark Feigenbaum, provides the following services to clients in the US and Canada:
- Personal tax preparation
- Drafting US trusts and US wills
- Trust taxation work including Estate and Gift (Form 706/709) tax return
- Information reporting such as :
- Form 5471/5472, Information returns with respect to US owners of certain foreign (non-US) Corporations, or foreign owners of US corporations
- Form 3520/3520-A, Annual Return to Report Transactions with Foreign (non-US) Trusts and Receipt of Certain Foreign Trusts
- Form FinCEN 114, Report of Foreign (non-US) Bank and Financial Accounts
- Consulting and planning services on all complex tax compliance matters.
Our significant experience in navigating the complexities of the U.S. and Canadian tax systems means that we regularly receive complex referral cases from both sides of the border. We provide discreet, timely, and professional results for clients facing challenging or complex situations.
Contact us to learn how our skilled team can assist you with your cross-border tax matters and provide you with comfort in knowing that you are in experienced hands. Contact us at firstname.lastname@example.org, or call us at (905) 695-1269 or toll free at (877) 275-4792.