Last week's article highlighted the most significant changes in the 2014 federal budget. One important issue I did not address was updates on the Foreign Account Tax Compliance Act (FATCA). Since this is not necessarily a normal budget item and since tying to summarize the updates in two or three sentences is nearly impossible, I decided to exclude it last week and write a separate update on this issue instead.
FATCA is U.S. legislation passed in 2010 that created new identification, reporting and withholding requirements for foreign financial institutions with respect to U.S. accountholders and U.S. source payments.
The objective of this legislation is to prevent U.S. persons from evading taxes owed by holding assets outside of the country and the new rules become effective on July 1st2014.
In order to comply with FATCA, Canada signed an Inter-Governmental Agreement on Feb. 6. Not signing an agreement was basically not an option as the penalties proposed by the U.S. were just too high.
Unfortunately, this new legislation is not only affecting U.S. citizens who are attempting to hold assets offshore but also anyone who holds U.S. citizenship or a U.S. green card; a "U.S. Person." If you spend enough time in the U.S. in a given year, you could qualify as a U.S. resident and also be included.
There are hundreds of thousands of Canadians who will be affected; some who have lived here for most if not all of their lives and some even forget they hold dual citizenship at all.
Under the FATCA rules, Canadian financial institutions will be required to report all financial assets, through the Canada Revenue Agency (CRA), to the U.S. Internal Revenue Service (IRS).
Once the new rules are implemented, institutions will be required to determine if an investor is a U.S. person and if so, report the appropriate information about their accounts.
Studies show the vast majority of Canadians who hold dual-citizenship are not filing their U.S. returns (this has always been a requirement) and the new reporting rules will bring most of these "violators" to light.
Registered accounts such as RRSPs, RRIFs, RESPs and TFSAs will be exempt for taxation, but their existence must still be reported and declared on U.S. tax returns.
While filing dual tax returns has always been a requirement, many have not done so to date and that may soon come to an end.
Having said that, FATCA's timeline has already been extended several times and it's possible more extensions could occur. Likely though, the July 1stwill hold true and the time to prepare is now.
For the majority of Canadians, FATCA will have little impact beyond being asked to indicate whether or not they are a U.S. Person upon opening account.
But for those with U.S. ties, these new rules could be very troubling. Substantial new accounting and legal fees could be on the horizon and potentially new taxes owing as well. For anyone that might be a U.S. Person or think they are affected, I would suggest speaking with your financial or tax adviser right away.
Brett Millard is a certified financial planner and owner of SPEIR Wealth Management Inc. Email
or call 778-478-4277.