With the pending implementation of a new U.S. tax law, now is the time to find out who of your clients are American citizens and how to safeguard their investments.
If you want the IRS off your back, starting scouring your client files for U.S. citizens now, advises one Toronto advisor.
The new U.S. tax law, FATCA – Foreign Account Tax Compliance Act – which officially rears its head on July 1, is about to force U.S. citizens, residing outside the United States, to become fully financially accountable to their ‘home’ country.
Over the next two years, banks and other financial institutions in Canada and across the globe will have to identify to the IRS which customers are “indicia” – meaning U.S. citizens or former permanent residents who are required to file U.S. tax returns regardless of where they reside in the world. Additionally, anyone opening a new account will be required to disclose whether they are a “U.S. person.” Those who answer 'yes' may be flagged.
This process is estimated to cost upwards of $100 million for each Canadian financial institution. Residents directly impacted include dual citizens, Canadians with Green Cards and 'snowbirds' who spend a large amount of time in the U.S.
“All U.S. citizens living in Canada who have been under the radar and haven’t been filing their taxes, they are not going to be able to hide much longer,” says Matt Altro, CEO of MCA Cross Border Advisors. “If it (FATCA) convinces people there is no hiding from the IRS anymore, that could be a good thing because they won’t get caught with major tax repercussions down the road.” (continued on Page 2)
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But, the implications are not just restricted to filing personal income tax. Registered accounts such as RESPs and TFSAs are considered "foreign trusts" by the IRS
and are also potentially taxable. This becomes more complicated for people – for example those born in Canada to U.S. parents or born in the U.S. to Canadian parents – who may not realize they are U.S. citizens.
This, according to Altro, is why Canadian advisors need to get with the program.
“In addition to filing taxes, there is usually a bunch of other problems,” says Altro, who is one of a niche group of advisors qualified to service both Canadian and U.S. clients. “There are people getting advice from good Canadian advisors that are good at Canadian financial planning, but are not taking into account the U.S. tax system. Some good planning in Canada does not work on the U.S. side and they (clients) end up with onerous tax consequences.”
In his business, Altro conducts a financial audit on every client he decides to take on, making sure that all U.S. citizens clean up their acts (i.e.. filing outstanding taxes), before a financial plan is developed. He recommends all advisors do the same for their U.S. clients over the next several months, working with a cross-border specialist – either in-house or third-party – who knows the U.S. system inside and out.
“If an advisor is not getting ahead of this, figuring out which clients are U.S. citizens and what they need to do to clean up any issues they may have, then some other advisor will point this out to the client,” warns Altro. “(The law) will create a lot more awareness of the importance of understanding whether you need external or internal help to figure out what the implications are for U.S. clients.” (continued on Page 3)
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In the meantime, Canada and the U.S. have yet to work out an official agreement before FATCA's July 1 implementation deadline. Once the deal is established, financial institutions will also be required to send annual reports on flagged accounts to the IRS or the Canada Revenue Agency (dependent on the agreement established), as of March 2015.
FATCA tips for banks:
Beware home ice advantage, urge advisors
Major player offers mea culpa
CRA cracks down on offshore accounts
The new U.S. tax law, FATCA – Foreign Account Tax Compliance Act – which officially rears its head on July 1, is about to force U.S. citizens, residing outside the United States, to become fully financially accountable to their ‘home’ country.
Over the next two years, banks and other financial institutions in Canada and across the globe will have to identify to the IRS which customers are “indicia” – meaning U.S. citizens or former permanent residents who are required to file U.S. tax returns regardless of where they reside in the world. Additionally, anyone opening a new account will be required to disclose whether they are a “U.S. person.” Those who answer 'yes' may be flagged.
This process is estimated to cost upwards of $100 million for each Canadian financial institution. Residents directly impacted include dual citizens, Canadians with Green Cards and 'snowbirds' who spend a large amount of time in the U.S.
“All U.S. citizens living in Canada who have been under the radar and haven’t been filing their taxes, they are not going to be able to hide much longer,” says Matt Altro, CEO of MCA Cross Border Advisors. “If it (FATCA) convinces people there is no hiding from the IRS anymore, that could be a good thing because they won’t get caught with major tax repercussions down the road.” (continued on Page 2)
#pb#
But, the implications are not just restricted to filing personal income tax. Registered accounts such as RESPs and TFSAs are considered "foreign trusts" by the IRS
and are also potentially taxable. This becomes more complicated for people – for example those born in Canada to U.S. parents or born in the U.S. to Canadian parents – who may not realize they are U.S. citizens.
This, according to Altro, is why Canadian advisors need to get with the program.
“In addition to filing taxes, there is usually a bunch of other problems,” says Altro, who is one of a niche group of advisors qualified to service both Canadian and U.S. clients. “There are people getting advice from good Canadian advisors that are good at Canadian financial planning, but are not taking into account the U.S. tax system. Some good planning in Canada does not work on the U.S. side and they (clients) end up with onerous tax consequences.”
In his business, Altro conducts a financial audit on every client he decides to take on, making sure that all U.S. citizens clean up their acts (i.e.. filing outstanding taxes), before a financial plan is developed. He recommends all advisors do the same for their U.S. clients over the next several months, working with a cross-border specialist – either in-house or third-party – who knows the U.S. system inside and out.
“If an advisor is not getting ahead of this, figuring out which clients are U.S. citizens and what they need to do to clean up any issues they may have, then some other advisor will point this out to the client,” warns Altro. “(The law) will create a lot more awareness of the importance of understanding whether you need external or internal help to figure out what the implications are for U.S. clients.” (continued on Page 3)
#pb#
In the meantime, Canada and the U.S. have yet to work out an official agreement before FATCA's July 1 implementation deadline. Once the deal is established, financial institutions will also be required to send annual reports on flagged accounts to the IRS or the Canada Revenue Agency (dependent on the agreement established), as of March 2015.
FATCA tips for banks:
- Accounts under $50,000 will be given the green light, unless the bank knows the client has U.S. status.
- Accounts over $50,000 will be flagged if data indicates U.S. connections.
- Individuals believed to be U.S. citizens can be flagged.
- Indicators for U.S. connections include: U.S. birthplace, U.S. addresses or phone numbers, an U.S. power of attorney, or standing orders to transfer funds to the U.S.
- All identified "U.S. persons" will be required to fill out a special taxpayer identification and certification form.
- Financial institutions or customers that don’t comply with the law could face penalties including a 30 per cent withholding tax on all U.S. source income and the sale of U.S. securities.
Beware home ice advantage, urge advisors
Major player offers mea culpa
CRA cracks down on offshore accounts
