A tax crackdown by the United States has sent more than one million Americans and green-card holders living in Canada scrambling to figure out how to comply.
The move is part of a push by the U.S. Internal Revenue Service (IRS) to make sure U.S. taxpayers are paying what they owe on foreign accounts. Unlike most countries, the U.S. requires its citizens to file annual tax returns based on their worldwide income, regardless of where they live.
That means that people like Kerry Knoll's two teenage daughters, who have never had a U.S. address or earned a penny there but have dual Canadian and American citizenship, will have to file U.S. tax returns on accounts they hold in Canada and may face penalties.
"Suddenly we are being told that my daughter's savings account from her summer job is considered an illegal offshore account by the Americans, something that I find preposterous," Mr. Knoll said in an interview.
"My daughters might owe thousands out of their registered education savings plans (RESP). These are not even taxes, these are penalties because it was not reported. And the reason we did not report it is because we had no idea we were required to," Mr. Knoll said.
Starting in 2013, the IRS will require financial institutions outside the United States to disclose all accounts held by current and former U.S. citizens and green-card holders. They will likely have to file years of U.S. tax returns and detailed annual account disclosure.
Finance Minister Jim Flaherty said Friday that Canada is not a tax haven and that the U.S. Foreign Account Tax Compliance Act will place an onerous burden on Canadian financial institutions.
"Unfortunately, U.S. tax law does little to distinguish between U.S. citizens living on sandy beaches in Caribbean tax havens and those living in a relatively high-tax country like Canada," said Warren Dueck, a certified public accountant and chartered accountant with W.L. Dueck & Co. in Richmond, B.C.
The IRS has issued a limited amnesty for U.S. citizens, residents and green-card holders to report their foreign bank accounts. Under the Offshore Voluntary Disclosure Initiative, which ends on Aug. 31, penalties are reduced to a range of zero to 25 per cent of the balance of all non-U.S. financial accounts and assets in 2010.
Mr. Dueck, who specializes in cross-border tax matters, offers these tips for any U.S. citizens, residents and green-card holders living in Canada who want to come clean to Uncle Sam:
1) Determine your status. If you are a U.S. citizen or resident, a dual citizen or a green-card holder, you are generally required to file U.S. federal income-tax returns.
2) Americans whose financial accounts outside the U.S. do not exceed $10,000 in aggregate are generally only subject to tax penalties if they owe U.S. tax. They still have to file returns.
3) All U.S. citizens, residents and green-card holders who own financial accounts outside the U.S. that exceed $10,000 in total at any time of the year must disclose them in the U.S. Department of Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly called FBARs.
4) A "foreign financial account" means Canadian bank accounts, checking and savings accounts, investments, securities and brokerage accounts, RRSPs, RESPs, TFSAs, insurance and annuity policies with a cash surrender value, commodity futures or options account, shares in a mutual fund, etc.
5) U.S. citizens, residents and green-card holders who own 10 per cent or more of a Canadian or other non-U.S. corporation, partnership or other entity, must disclose that or face penalties of $10,000 for each year and for each entity.
6) The amnesty program allows U.S. citizens, residents and green-card holders to eliminate or minimize their tax penalties and also protects accepted applications from criminal prosecution. In most cases, failure to submit information will mean more severe penalties in the future.
7) Paying taxes in Canada does not offset all of your U.S. tax obligations. Figure out what your U.S. tax liability is before you apply for the amnesty, since it may change your overall tax strategy.