Americans in Canada can come out of hiding now that the IRS is offering amnesty to delinquent tax filers.
But it’s not out of the goodness of the IRS’s heart.
“The U.S. wants to capture as many filers as possible, without them being afraid to come forward,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management. “That way, the U.S. government will have them on its radar should their incomes increase.”
No matter where Americans live, they must file U.S. tax returns and Foreign Bank and Financial Accounts Reporting (FBARs); in addition to the tax returns for their countries of residence.
That rarely happens. “Of the million U.S. citizens living in Canada, we know anecdotally that most are not in compliance with U.S. law,” Golombek says.
Now, the IRS will relax penalties related to unfiled tax returns and delinquent FBARs.
Unless a filer is very rich or has U.S.-source income, “it’s rare to owe U.S. tax because of the foreign tax credit,” he adds. “Because the Canadian tax system has such high tax rates, in most cases you would get a foreign tax credit on a U.S. return.”
However, penalties associated with not filing FBARs, which apply to people with foreign mutual fund or securities accounts, are severe.
“They ranged from a willful failure to file starting at $100,000, to the non-willful failure penalty, which was $10,000 for every account and every year you didn’t file. That alone was enough to prevent many dual citizens from coming forward.”
Under the IRS’s new policy, if clients are delinquent, they only have to file three years’ worth of tax returns and six years’ worth of FBARs. If they owe less than $1,500, there will be no penalties.
“That should cause most U.S. citizens to want to pay to have their returns filed,” says Golombek.
More good news for Americans in Canada: the IRS is making it easier for them to shelter gains earned in RRSPs and RRIFs.
“The U.S. doesn’t recognize income and gains earned in these vehicles as being non-taxable, unless you file an annual election under the Canada-U.S. tax treaty (Form 8891).”
Without that form, all gains earned in those vehicles are reportable (and taxable) on a U.S. return.
Now, clients can get retroactive relief if they submit statements requesting extensions to file Form 8891 for each of the tax years with gains in registered accounts; and explain why they failed to make the elections in the first place.