February 6, 2014 Update: Yesterday, Finance Canada announced an IGA with the United States that may change some of the information presented here. We will update as more information becomes available and we better understand what it may mean.
Perhaps you’ve just read one of the sensationalist IRS-propaganda articles in the media that says every person born on US soil is a US citizen and must file income tax reports to the US, and are at risk for huge penalties. Perhaps you heard about this situation through another person who has a US connection. Either way, you’re probably confused about what this means and what you need to do about it. We’re going to offer some advice, but keep in mind that we are not lawyers, and none of this is legal advice, it is simply a sharing of information that we’ve gathered over time that we hope will help people make sense of things.
The following information is Canada-centric, as that is what we know. We don’t mean to exclude anyone, but necessarily, people from other countries must check their particular countries laws, tax treaties and positions on FATCA. We’ve tried to keep this simple and relatively acronym free, however, some must be used. To find out what acronyms stand for or what certain terms mean, please refer to the Acronyms and Definitions post. You’ll probably also want to check out the FAQ post. We’re not attempting to explain all the complex and convoluted laws here, this is a simple overview, but research the links provided on this site and others, and you can find much more detailed information.
So, you suspect the US considers you a US person. You might be feeling a) worried, upset and frantic about how it’s going to affect you, or b) that the US will never find you because you haven’t had anything do with it for years.
In the latter case, unfortunately, it’s entirely possible that the IRS will find you, through FATCA. This new law by the US is requiring banks around the world to identify and report on their customers who are US persons. FATCA is set to go into force in January 2013, and while it violates Canadian law, nevertheless, the banks are gearing up to comply with it. They will be reviewing accounts with more than $50K, whether a TFSA, RRSP RDSP, RESP for children, GIC, or regular savings or chequing account, looking for indications of a US connection. Although the limit is $50,000 now, there is no guarantee this limit will not be lowered in the future. If you have existing accounts under the $50k, the banks will go on what they know about you as a customer (KYC/AML rules). If you open a new account, they may ask if you are a US person. There are many people fighting against FATCA, but it’s going to be some time before we know what kind of protection will be provided by the Canadian government and Canadian law courts. We also don’t know the final form that FATCA will take. The draft FATCA guidelines can be found under links on this site.
You may wonder what about credit unions. That also is a huge question. Some may have no US investments so they don’t have the IRS financial hammer over their heads. Some of these have told customers they will not comply with FATCA. Others that do have US investments or do some business in US have told their customers (also called owners) they are resisting FATCA, but they don’t know yet what they will do.
However, even if the IRS does find you through FATCA, it’s not necessarily the end of the world. The Canadian government, through the Minister of Finance, Jim Flaherty, has stated that Canada will not collect taxes or fines on Canadian citizens on behalf of the IRS, as long as that liability occurred while the person was a Canadian citizen. Further, we suspect (or maybe it’s hope) that the IRS will not expend the massive resources required to pursue us regular people (also called minnows), especially with that protection given to us by our Canadian government. The government’s stance does afford some protection, as long as you don’t have any US income on which 30% can be withheld by your bank.
If you’re in the second, frantic, category, first thing you need to understand is that this is likely to be a lengthy process for you, so you might as well take a deep breath, relax a little, and then educate yourself on your options. This is the best piece of advice we can offer: Do not rush into anything before you’ve thoroughly educated yourself. Do this for yourself before you consult any kind of a professional, whether a lawyer or a tax specialist.
There simply is no right way, or one way, to deal with this.
Some people, most particularly those who want to retain their US citizenship, feel they must comply and file all of the income tax returns, and reports on financial accounts, and continue to do so for as long as they remain a US citizen. That’s definitely one option, but not one either of the authors have much experience with, however there are people doing this. Retaining or renouncing citizenship is a very personal, and often emotional, decision. While most actually agree that it doesn’t make economic sense to remain a US citizen, they choose to do so because of emotional, financial or family ties to the United States.
Many believed they relinquished or renounced US citizenship when they became citizens of Canada years or even decades ago. For many years the US Consulate was clear, firm and direct that loss of US citizenship was “permanent and irrevocable.” They have been stunned to learn that, due to a US Supreme Court decision in 1986, the US may now think otherwise.
A few lucky ones received Certificates of Loss of Nationality at the time. Most had no idea such a certificate even existed and did not receive one.
Some lawyers think the IRS will recognize people in this group are NOT US citizens or persons. Other lawyers have advised that anyone born in US is a US citizen and that those individuals should become compliant, unless they can prove their relinquishment with a CLN. These mixed messages compound the confusion, frustration and worry.
Some people are spending the time, effort and money to come into compliance and then immediately taking the necessary steps to renounce their US citizenship.
There are choices to be made if you choose to come into compliance, such as entering a voluntary disclosure program, quietly filing all of the required years of tax returns and reports, or filing all of the reports and returns and opening a dialogue with the IRS. Each of these options must be considered carefully, most particularly the entering into one of the disclosure programs, which can be very dangerous, financially.
For the people who will try to stay below the radar and hope the IRS never finds out about them, success will be depend, in large part, on if the Canadian government will step up to the plate to uphold its laws and protect its citizens. If FATCA goes through as the United States intends, without opposition from our government, this will option will likely fail in the end.
Many people are taking steps to prove that they are not US citizens. This has been successful for several people, and they have obtained their Certificate of Loss of Nationality from the US State department, backdated to the date they became Canadian citizens. This is very good news for thousands of people around the world. If you can prove you are not a US citizen and have not been for many years, then obviously there is no need to file anything with the IRS. A CLN may be required to prove to banks that you are not a US person, but that’s something we just don’t know at this stage. FATCA draft regulations do provide an alternative to a CLN—a non-US passport or other proof of non-US citizenship and a reasonable explanation of renunciation of US citizenship.
At this time, Canadian banks have no legal authority under Canadian law to demand information about place of birth or citizenship. Unfortunately, to date, the government has not made a statement reassuring Canadians that Canadian laws will not be changed.
Others have decided that they will simply refuse to comply, even if identified as a US person. The consequences of this are just not known yet. If a person has no income from the US, no property in the US, has no possibility of inheriting from a US person, it may be an option to consider. If someone admits to their bank that she was born in the US, but refuses to fill out the FATCA-required IRS forms, the bank is required to report that person as a ‘recalcitrant account holder’ and must withhold 30% of US source income. There are consequences to a bank for having recalcitrant account holders and we just don’t know at this stage how the banks are going to deal with it. We do not yet know if it will affect your ability to retain your bank accounts, open new bank accounts, obtain mortgages or have RRSPs.
In short, some of the options are:
- Agree that you are a US person, file all past returns and reports, and continue to do so for all of your remaining years of life;
- Agree that you are a US person, file all past returns and reports, and then renounce your US citizenship;
- Prove you are not a US citizen by obtaining a Certificate of Loss of Nationality;
- Do nothing until further information is available.
This post at citizenshipsolutions.ca gives tips on What you should consider before contacting a lawyer. This is written by a lawyer who is a dual Canadian-American citizen.
Only you can decide what is right for you. Read, read, read, and read some more, and then join in the discussions and ask questions. Take your time to make sure you’re making the decision that’s right for you and your family.