A target on American clients in Canada

The increased risk for Americans living in Canada and their Canadian advisors, money managers and financial planners comes from a seemingly innocuous source – five countries coming together to share information to fight tax evasion. 

American clients living in Canada may believe they are tax compliant because they pay taxes to Canada, while the American government views non-filers and non-reporters with a very different lens – as evaders. In that light, can an advisor invest or move their client's funds without risking being implicated in a crime, such as in aiding and abetting money laundering? 

Tax evasion is a serious threat for countries. The words "tax evasion" conjure up a picture of a bad actor (Al Capone) not a Canadian whose mother is American.This misconception is dangerous, as even the U.S. Taxpayer Advocate acknowledges the amount of benign actors (such as Canadians born in America who have never filed a US tax return) who can be swept into the IRS net.  Advisors, particularly investors and planners, need to take care to avoid taking on any of this liability themselves. 

Canadian advisors come into particular focus in 2020 as the Organization for Economic Cooperation and Development Taskforce on Tax Crime urged its member countries to collaborate to combat transnational tax crime by creating The Joint Chiefs of Global Tax Enforcement, known as the "J5," which is comprised of members of the United States, Canada, Australia, the United Kingdom, and the Netherlands. 

Collaborative efforts of the J5 will uncover a broad array of tax and reporting noncompliance – both the transnational tax crimes they seek to uncover, as well as a plethora of lessor and inadvertent offences. Americans living in Canada and their Canadian advisors may find themselves swept up in the same net as willful tax evaders and their nefarious advisors, for seemingly innocuous infractions.  Failing to report foreign financial assets, while not necessarily born of a tax avoidance motive, is a violation of the Bank Secrecy Act. As penalties associated with failure to report foreign financial assets are draconian, BSA violations are an easy victory for the J5. 

During the February J5 meeting, a plan was devised to crackdown on financial institutions and individuals suspected of wrongdoing. Don Fort, chief of IRS CI said: "The group has moved the needle by years in terms of result and successes. I expect 2020 will be a game-changer for the J5 and criminals will not know what hit them." 

Stephane Bonin, Director General, Canadian Revenue Agency said, “Together, we will continue to tighten the net on those who break tax laws, and ensure they face the consequences of their actions.” The J5 is not making empty threats, it has already cracked down on non-US financial institutions.

The US and Canadian governments are focused on the financial and banking activities of their citizens and financial service providers, and are less tolerant of mistakes and avoidance schemes.  Where a transactional or behavioural pattern appears suspect, the US government may penalize particularly harshly (more than half the assets each year). Trying to refute a presumption of being willfully blind to filing obligations after being caught through a J5 crackdown will be an uphill battle. 

This risk is heightened for Americans in Canada as US persons (citizens, residents and Green Card holders) are taxed on their worldwide income and are required to report a wide variety of assets (including bank and investment accounts, and certain life insurance, pensions, trust and entity interests) on specific US reporting forms. As Americans living in Canada pay significant taxes to Canada, they are especially prone to failing to file "duplicative" US forms. However, that does not mean that no tax would be owed year-to-year, due to tax mismatches (such as different taxation of trusts), evolving asset composition (such as retirement funds), or the fact that filing a return is required to apply withholding against a return, or to utilize the Canadian foreign tax credit against US tax otherwise owed.

Canadian advisors, money managers and planners for American clients can add tremendous value by helping their clients find support to come into compliance if noncompliance is suspected.  It is also critical that advisors ensure they do not inadvertently lead their clients in noncompliance or money laundering schemes, which would pose significant risks to both advisor and client. Advisors take risks in engaging with a noncompliant client in planning that could be deemed to obscure noncompliance (such as wrapping the assets in entities or trusts, gifting the assets or engaging in certain investment schemes). 

The J5, FATCA protocols, and government datamining efforts, continue to raise the risk of detection for noncompliant US persons. Elizabeth Thompson of CBC Radio Canada reports, "To date, Canada has shipped 2.6 million records of Canadian residents who could be subject to US taxes south of the border." As the IRS reports that FBAR filings only exceeded 1 million total filings in 2014 (for all countries), there is a large disparity between the number of US persons with non-US assets and the number of US persons who are in compliance. For many of those Canadian-Americans, it is only a matter of time before the IRS investigates.

To this end, the IRS offers various offshore voluntary disclosure programs to allow non-compliant US persons with unreported non-US income, assets, accounts and entities a chance to cure their reporting defects – to "come clean" to the government before they are discovered. These programs allow the IRS to discipline those who come forward in a more predictable manner commensurate with the reason for their noncompliance, while dedicating greater resources to prosecuting the individuals who are uncovered through their other efforts.

Americans residing in Canada faced a huge push this January from their Canadian financial institutions to provide social security numbers or face account closure. Canadian advisors can help their clients understand what will be done with the data. These individuals now have a window to enter into a program before their file is examined by the IRS, at which point it will be too late. The advisors have an opportunity to identify clients who may be negatively impacted and recommend these clients seek qualified professional help to correct their errors. 

Since the requirements of each program are complex, Canadian advisors can achieve the best result for their clients by working in synergy with a qualified US tax attorney. The Canadian advisor brings knowledge of the client's assets and goals, while the US tax advisor determines the best path forward.  Each program has a different penalty base, with the highest penalties reserved for those who willfully evaded their obligations, and the lowest (or even zero) penalties for people who made mistakes.  There are special options for Canadians (including a Canadian RRSP process) that can make the clean-up process fairly simple. The existence and terms of a disclosure program are not guaranteed, so time is of the essence for initiating participation. 

With the increasing threat of detection and the uncertainty as to the nature and availability of the various disclosure programs, advisors in Canada should consider combing their files for clients who need immediate help to come into US tax compliance. Canadian advisors should also look inward to make sure that they are not engaging in practices that could attract undesirable J5 attention.