900,000 Canadian Bank Records Were Recently Sent to the IRS – What you Need to Know

A new CBC article notes that the Canadian government sent a significant trove of records to U.S. tax authority, the Internal Revenue Service in September of 2019 in accordance with a “controversial information-sharing deal” and that the quantity of records involved represents a sharp increase of almost one third over the previous year.

Canada Revenue Agency’s release of banking information to the IRS is pursuant to the United States’ Foreign Account Tax Compliance Act, often referred to as “FATCA”.

What is FATCA?

FATCA became U.S. law in 2010 because of the discovery that foreign financial institutions such as UBS, Credit Suisse and others were helping U.S. persons evade U.S. tax by not reporting financial accounts held by them outside the United States.  Canada agreed to implement FATCA for U.S. persons living in Canada, including “recalcitrant account holders” to avoid subjecting Canadian financial institutions and their account holders to 30% withholding on U.S. investment income (including on the gross proceeds from the sale of shares).  Recalcitrant account holders are individuals who are unwilling to sign under penalties of perjury that they are either a U.S. person or not a U.S. person.

The information released allows the IRS to identify U.S. persons who have failed to report investment income and other financial information required under U.S. tax law.  These failures may lead to significant U.S. tax penalties, including the inability to renew a U.S. passport and criminal sanctions.

What Will The IRS Do With These Records?

Using the Canadian banking information provided, the IRS is expected to issue notices to U.S. persons in Canada and elsewhere who have failed to file U.S. tax returns. Unlike other countries, the U.S. taxes its citizens and residents on their worldwide income regardless where such income is earned or where the individual actually resides. Court decisions in Canada have upheld the terms of Canada’s Intergovernmental Agreement with the U.S. to enforce the provisions of FATCA.

Minimizing The Risk of Penalties

U.S. persons (including U.S. citizens, green card holders and individuals meeting the “substantial presence test” under U.S. tax law) may avoid or minimize penalties by voluntarily filing delinquent U.S. tax returns prior to being notified by the IRS.  Once contacted by the IRS, a tax filing is no longer voluntarily.

The IRS has provided alternative tax filing strategies for delinquent U.S. tax filers, including for individuals resident outside the United States.  Most U.S. persons resident in Canada will not owe any U.S. tax, but without filing the required U.S. tax returns will be exposed to penalties for failing to make disclosures of financial accounts outside the U.S. required under U.S. tax law.  (Similar disclosures are required for certain interests in non-U.S. investments and entities formed outside the U.S.).

What If I’m A Canadian Resident With US Tax Obligations or Have Renounced My US Citizenship?

Canadian residents who are required to comply with U.S. tax filing may have some protection from U.S. tax collection efforts.  In other cases, the CRA will assist the IRS’ tax collection efforts under the Canada-U.S. tax treaty. 

Renunciation of U.S. citizenship does not alter U.S. tax obligations from the period prior to such acts, and may result in more significant U.S. tax penalties and tax obligations. 

Conclusion

Failing to file the required U.S. tax returns and make the related disclosures puts U.S. persons at a significant risk. If you believe you may be subject to U.S. tax or filing requirements or have questions about the impact FATCA may have on your situation, please contact Warren Dueck or other Andersen personnel at your convenience.