Canada Revenue Agency and Internal Revenue Service to swap information to keep taxpayers honest
Ginny Hills and Gwen Deegan are taking the Foreign Account Tax Compliance Act (FATCA) to Federal court. Both women were born in the United States to Canadian parents and have lived in Canada almost all their lives. Even though they consider themselves Canadians, they are also U.S. citizens since they were born in the country. And that means the Internal Revenue Service (IRS) expects them to file taxes and comply with financial reporting requirements.
The case is expected to be ruled on this month and I wish both of the plaintiffs luck with the outcome. I doubt that it will change anything but they are right to object to the breach of their privacy. And they are not the only ones. There are other lawsuits filed by other U.S. citizens caught in the same situation around the world. Even U.S. presidential candidate Rand Paul has filed suit to repeal FATCA provisions.
Under the FATCA rules, financial institutions are obligated to provide the IRS with information about accounts and holdings of U.S. citizens. Basically, the IRS is trying to make sure you are not hiding money overseas though Canada is hardly a tax haven. But there is more to this overreaching legislation that just tracking down deadbeat U.S. citizens.
By agreeing to FATCA, the Canadian government essentially threw snowbirds under the bus too because U.S. financial institutions will now report information on accounts held by Canadian citizens to the Canada Revenue Agency. So while people are concerned about their financial institution being obligated to send information to the IRS, the reverse will be true for Canadian citizens with holdings in the U.S. This is not a one-sided exchange of information. The CRA will also be checking on tax cheats.
In my experience, the IRS wants people to jump through their hoops without any consideration that we are not part of the United States. And they are not concerned with privacy or our constitution. They want us to follow their rules even if they don't always make sense.
FATCA also impacts people who are married to U.S. citizens since joint accounts must also be reported to the IRS. This means their name and address are on the FATCA form filed with the IRS and the Report of Foreign Bank and Financial Reports (FBAR) with the Treasury Department reporting their financial holdings even if they are a Canadian citizen with no U.S. status.
The bookkeeping headache that this has created for financial institutions is staggering and the cost could reach $100 million dollars for each Canadian bank. FATCA basically requires them to scan their databases for anyone who might be considered a U.S. citizen and banks must produce the appropriate slips for the accounts or holdings. In Europe, there have been U.S. citizens who have been told to close their bank accounts or pay their mortgage immediately because banks do not want to be subject to the FATCA requirements.
Unfortunately, there are few alternatives for U.S. citizens. You can move your accounts to small credit unions who aren't big enough to fall under the regulations but if they become too big, FATCA requirements will kick in.
Though I wish Deegan and Hills success with their lawsuit, the chances of the Federal court trying to override the U.S. government is highly unlikely. Canada has a vested interest in cooperating with the U.S. So if you are counting on this court case to relieve you of your U.S. filing requirements, you are likely going to be disappointed.
If you have U.S. filing requirements, you cannot continue to ignore them. The IRS has offered a streamlined filing program since 2011 but we do not expect this to remain open indefinitely. Unless you are living in a remote corner of the planet, it is going to be hard to plead ignorance when the IRS finds you. Unfortunately, the argument about fairness is not relevant to the IRS. You can't avoid your filing obligations even if you decide to renounce your U.S. citizenship.
ALSO ON HUFFPOST:
Keep a copy of every investment account in which you have non-registered funds and make sure you have a T-slip for all the investment income (dividends, interest, capital gains) you earned during the year.
Locate your notice of assessment from the year before to see the exact amount of RRSP contribution you can make this year. Also, check if there are any unclaimed contributions.
From that same notice of assessment document, check to see if there are any expenses that have been carried forward that you may use this year.
If your income is going to be substantially higher next year, do not claim your RRSP contribution this year. Wait until the following year when you are in a higher tax bracket to claim it.
If you have children currently enrolled in post secondary education, consider transferring the tuition credit to your own tax return.
If you or anyone in your family has a medical condition that restricts your daily activities, consider filing for the disability tax credit. You may be able to recover this tax credit as far back as 10 years – which is equal to about $1,500 a year.
If applicable, don't forget to record the capital gain on the sale of your cottage in Canada or vacation property outside the country. However, you may not always have to declare your summer home. Talk with your accountant to see what makes better financial sense. If the cottage, for example, has increased substantially more in value than the house you currently reside in, it may make sense to declare the summer home as your principal residence. Remember, this move does not attract capital gains and defers paying capital gains on the home you reside in.
If you need to travel outside of your region for medical care, don't forget to claim meals and travel for yourself and your spouse.
If you live in a household with two taxpayers, consolidate donations and have one taxpayer claim them all. This way the tax credit increases substantially on donations over $200.
If your income is low, don't forget to report your rent or property taxes in order to qualify for provincial tax breaks for rent and/or an HST refund, for example.
Stuck? Get in touch with an accountant. To be extra cautious, ask if they attend tax update seminars through the year to stay current. Avoid people who strictly rely on tax software.
This year, keep a file handy to hold all of your receipts and other documents required for filing taxes. This way, everything will be in the same spot come April of 2015.
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