U.S. tax risk

According to the latest stats, roughly one million U.S. citizens live in Canada. Are you one of them? And, if yes, are you filing your U.S. income tax returns every year?

U.S. citizens who don’t do their yearly tax filing should be aware that Foreign Account Tax Compliance Act (FATCA) rules may affect them.

Start with the citizenship test

You may be a U.S. citizen, even if you think of yourself as 100% Canadian. If you were born in the U.S., you’re likely a U.S. citizen unless you took formal steps to relinquish your citizenship. Many people are shocked to find they’re U.S. citizens even though they returned to Canada as small children and have never obtained a U.S. Social Security number or a passport. And, even if you weren’t born stateside, you may be a U.S. citizen if your mother or father was one.

Do you have U.S. tax exposure?

The U.S. tax regime is unusual. While most countries tax based on residency, the U.S. imposes tax on its citizens (including dual U.S. citizens) on worldwide income, no matter where they live. These rules even apply to green card holders.

So, if you’re a U.S. citizen or green card holder in Canada, you must report and pay tax to the IRS on your worldwide income. The tax treaty between Canada and the U.S. provides relief for dual payers, and in many cases U.S. tax liability is eliminated. But you still have to file U.S. returns even if you have no taxes to pay.

In addition to a tax return, you may also be required to report information on your non-U.S. bank and investment accounts, as well as your RRSP. You do this reporting on the Report of Foreign Bank and Financial Accounts – FBAR form FinCEN114, which you have to file even if you don’t owe any U.S. income tax. The penalty for filing failure is steep and the Internal Revenue Service is becoming increasingly vigilant in monitoring these forms.

U.S. citizens who own a Canadian private company or have an interest in a Canadian family trust may face additional reporting requirements and, again, there are large penalties for failing to disclose. These requirements impact many Canadian business owners who are also U.S. citizens or have U.S. family members.

If you are an American living in Canada and have not been filing U.S. returns, you should be concerned about FATCA.

The law was created to initiate a worldwide exchange of information on so-called “U.S. persons,” because the American government believes tax evasion is widespread. So, in response to current budgetary constraints, it’s lowering its tolerance. According to former IRS Commissioner Doug Shulman, “FATCA provides IRS with better transparency and additional tools that we need to crack down on Americans hiding assets overseas.”

Beth Webel is a partner and Kaye Bland is a manager at PwC.