Deadline for disclosure
Uncle Sam is coming to Canada with his hand outstretched and people with loose ties to the U.S. are being asked to fess up to the IRS about bank accounts and assets, which the US now wants to tax them on. Some call it a "witch hunt" and claim the IRS is "spreading fear." Some are asking their MLAs and even Stephen Harper to step in.
The deadline is fast approaching for US citizens in Canada to file their taxes with the IRS, causing panic among thousands of Canadian residents and dual citizens. Although Hurricane Irene has caused an extension of the deadline for the Offshore Voluntary Disclosure Initiative from August 31 to September 9, it has only prolonged the anxiety for many people.
"It's incredibly irritating," said Dawn C., a resident of Vancouver who has yet to find a certified Canadian accountant to file her taxes.
"I was born in Canada. I never lived or worked in the U.S., but my mother is American," she explained. "I've tried talking to someone at the IRS, but their lines are completely full -- I can't even leave a message."
U.S. tax law requires all citizens to file taxes, even those who do not live or work in the U.S. (unlike Canadian tax law, which is based on residency). While the law has been in place for many years, the crackdown on U.S. expats has intensified since the financial crisis.
Although the rule has been in place for many years, according to tax accountants, many long-term residents of Canada have only recently discovered their obligation to file taxes and Report of Foreign Bank and Financial Accounts (FBAR). As outlined in a previous article, many frantic U.S. citizenship holders have contacted their MLAs and MPs for fear that they would have to face heavy penalties (up to 50 per cent on their financial accounts) for not having filed their taxes in previous years.
Steven Flynn, a tax accountant at W.L. Dueck and Co. specializing in U.S. and cross-border tax, said that his office has been dealing with a high volume of inquiries from American citizens in Canada.
"We've been busy," he said. "We hired four people since July 1st, just to help us with this."
However, he felt that not everyone need panic.
"Everyone is really making a big fuss about the Sept. 9, deadline but you don't have to really do anything by then. You don't have to participate in the offshore disclosure. You can file a number of years worth of income tax, get caught up to date on what's called a quiet disclosure."
"There's risk that the IRS may decide to review or audit those returns and they may give you significant penalties, but they also might not do anything."
"Just letting the IRS come and find you is not a good idea."
While that course seems to be the most appealing, some expats are not happy with the implications.
"This has been the usual course -- you just quietly file 3 to 6 years of past tax returns plus the full financial disclosures required on the FBAR forms, separate from your tax return." said Clarissa B., a Vancouver Island resident who paints a grim picture of her scenario. "You hope it’s accepted, but you may not know for years. And while you wait, don’t plan any visits to your friends or family in the US. If the IRS doesn’t accept your quiet disclosure, you need to be prepared for even higher penalties than the OVDI and possible criminal prosecution."
Clarissa has been in Canada since 1975, and became a Canadian citizen in 1980. She is deeply frustrated that her husband, a single-nationality Canadian, now has to declare his assets to the IRS because of his wife's American nationality.
"He is very unhappy about this -- now his income is fair game for the IRS," she said. "Canadian business partners of dual Canadian-US citizens are also affected by the invasive disclosures required by the IRS. For people opening new bank accounts, they now ask if you're a U.S. citizen or not."
She said that she looked into renouncing her U.S. citizenship to save her the trouble, but found that it cost $450 for an application, and that the IRS would look into whether she had taxes owing before canceling her nationality. The cost and trouble to do so appeared too steep.
And speaking of cost, there are cases in which people are exempt from filing the FBAR (separate from income tax). People who have less than $10,000 total in aggregated funds -- as is the case with some individuals -- don't have to file the FBAR. However, as Flynn explained, the standards are very strict.
"For some people, that could be their normal balance, under $10,000 -- but maybe they could have one day when their balance is over that," he said. "If it exceeds $10,000 for even one day, they have to file it."
Clarissa said that the Canadian government should be able to "go to bat" for the many U.S.-Canadian citizens and the families being affected by the tax issue.
Does she expect Prime Minister Harper to seek a political resolution to the issue?
"No," she said bluntly. "I'm not terribly optimistic."
However, she believes that negotiations may pave the way for more just taxation of U.S. citizens living in Canada.
"For example, there are negotiations going on in this trade deal – the U.S. is trying to get Canada to share information with them for border crossing," she said, adding that while she does not expect results, she will be writing letters to the Prime Minister urging him to address the issue.
"Our government could be saying (in exchange), 'We want some realistic tax laws that don't invade Canadians' privacy.'"