Attention US citizens and dual citizenship residents living in Canada and having not filed US tax returns. The Internal Revenue Service (IRS) of the United States has recently announced an amnesty on tax filings.
In 2011 the IRS announced its plan to request of Canadian banks and other financial institutions information on US citizens holding assets in Canada. This is clearly an attempt to prevent US citizens from hiding taxable revenue.
Despite the uproar by taxpayers, lobbying by Canada’s financial institutions and diplomacy by Canada’s federal government, the US government has remained entrenched in its battle to get its share of taxes. Until last week, the best this concerted effort coming from Canada had succeeded in doing was to delay the implementation of the plan to 2014.
As an aside, and to be fair to the US, quickly and quietly the mantra of most developed countries has become, “we want our share of our citizens’ income taxes”.
What is the tax implication of this IRS plan?
A release this week from Chartered Financial Consultant Tim Affolter with the Affolter Financial Group, states, “… it has been my experience that the great majority of US citizens living in Canada usually do not actually owe additional US tax … due to the exemptions available under the tax treaty between our two countries such that the tax paid in Canada is generally enough to satisfy the US tax payable as well.”
Affolter goes on to say, “Along with the actual tax returns, there are certain “information” returns required such as the listing of foreign bank accounts and elections such as the treatment of RRSPs as tax-deferred retirement plans. Failing to file [information returns] before the deadline each year … carries onerous automatic late filing penalties which could run into the thousands, or even tens of thousands, of dollars. This creates a substantial disincentive to “catch up” for a US citizen who is currently non-compliant. Needless to say, then, the automatic disclosure to the IRS of a US citizen’s foreign bank holdings in 2014 will put them in a very scary situation.”
The “disincentive to file” reality appears to have reached the common sense branch of the IRS as it has just announced an amnesty for US or dual citizens living abroad who owe under $1,500 of US tax per year.
In these cases, the IRS states that, “… [tax return] review will be expedited and the IRS will not assert penalties or pursue follow-up actions.” In addition, on the late election to treat an RRSP as a tax-deferred retirement plan, the IRS states there will be “ … retroactive relief for failure to timely elect income deferral [on Canadian RRSP plans].”
These adjustments to the IRS taxation plan should give relief for most non-compliant US citizens living abroad. However, this amnesty will likely not be in effect indefinitely so it is best to act sooner than later. The revamped plan can be found by following the links at www.irs.gov
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.