FATCA reporting for U.S. citizens

The goal of the Foreign Account Tax Compliance Act (FATCA) is to prevent millions of U.S. taxpayers, and the global financial institutions that serve them, from evading U.S. tax on income and assets held outside the U.S.

An estimated seven million Americans live or work abroad, with about 1 million in Canada. Most, if not all, have bank, investment, retirement and insurance-related products with companies and advisors outside the U.S. American taxpayers must file annual tax returns on worldwide income and disclose their interests in accounts or other foreign entities outside the U.S.

Under FATCA, non-U.S. financial institutions have to report certain information to the IRS about U.S. persons’ financial accounts. Failure to do so results in a 30% withholding tax on U.S.-source income to the financial institution or its clients.

More than 80 countries, including Canada, have FATCA-related agreements with the United States government. About 77,000 Foreign Financial Institutions (FFIs) have signed on with IRS.

Most FFIs provide the required information directly to the IRS. Under Canada’s Inter-Governmental Agreement (IGA) with the U.S., Canadian FFIs instead provide the information to CRA, which in turn provides it to the IRS.

Canadian FFIs must disclose bank, mutual fund, brokerage and custodial accounts, annuity contracts and some life insurance policies that have an investment or savings component.

Registered plans (RRSPs, RRIFs, RDSPs, RPPs and RESPs) and TFSAs are excluded from the reporting requirement.

The results

Most Canadian FFIs have provided enhanced education and training around FATCA.

Many Canadian FFIs have sent out so-called FATCA letters to educate existing clients and confirm they are indeed U.S. persons for FATCA reporting purposes. Brokerage and insurance company applications have been changed to get advisors to determine whether new clients are U.S. persons under FATCA.

If you’re a new client, you’ll be asked to complete one of two IRS forms.

• U.S. persons (generally, U.S. citizens or green card holders). Complete IRS Form W-9 Request for Taxpayer Identification Number and Certification to confirm your U.S. Social Security Number.
• Non-U.S. persons. Complete IRS Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). The form confirms non-U.S.-person status and is used for reporting withholding obligations on U.S.-source income.

Although both are IRS forms, they stay with the Canadian FFI and will help it determine whether FATCA reporting’s required along with U.S. federal withholding tax and other reporting obligations.

I am not personally aware of any Canadian FFI turning away U.S. persons or closing their accounts. But a New York Times article titled “An American Tax Nightmare” documents examples of unfavourable treatment of U.S. persons by FFIs in Europe and elsewhere.

In one case, a couple lost their mortgage with a Swiss bank because the wife was American. Another example: An American working for a French multinational in Brazil was denied a promotion because it would have given him signing authority on the company’s bank accounts. As a result, the company would have had to disclose its transactions to the IRS.

What’s next?

A few Canadian citizens have filed a lawsuit against the Canadian Attorney General suggesting the Canada-U.S. IGA violates provisions of the Canadian Charter of Rights.

There’s also talk, given Congress is controlled by the GOP, that if the next president is Republican, we may see FATCA and Obama’s healthcare law repealed.

Lastly, we may eventually see FATCA applied on a global scale in what’s being dubbed GATCA. The OECD’s promoting it with the aim of curbing tax evasion through automatic exchange of information between FFIs across the globe.

A U.S. person’s advisor and bank must report:

2015
Regarding	Information to be reported to the CRA before May 2, 2016
Each specified U.S. person, either:	• Address
• holding a U.S. reportable account; or	• U.S. Tax Identification Number (TIN)
• who is a controlling person of a passive non-financial foreign entity (NFFE) that holds a U.S. reportable account	• Canadian Tax Identification Number
	• Account number or functional equivalent
	• Account balance or value

Custodial accounts	Total gross amount of:
	• interest;
	• dividends; or
	• other income
Depository accounts	Total gross amount of interest paid or credited to the account during the year
Other accounts	Total gross amount paid or credited to account holder with respect to the account, including aggregate amount of redemption payments made to account holder, during the year

2016
All information listed for 2015, plus:
Regarding	Information to be reported to the CRA before May 2, 2017
Custodial accounts	Total gross proceeds from sale or redemption of property paid or credited to the account during the year

2017 and onward

All of the information listed for 2016 is to be reported to the CRA before May 2 of the following calendar year.