IMPORTANT US TAX PAPERWORK FOR US CITIZENS LIVING IN CANADA

S.L. Richard Brunton

Failure to comply with US tax reporting requirements may be dangerous to your health!

That may be an exaggeration, but perhaps not in the case of many US citizens who became shocked and distressed in July and August, 2011, while reading certain Canadian newspaper articles describing a US tax “amnesty” program. During that time, many Canadian newspapers published chilling descriptions of potentially catastrophic US tax penalties that could apply to (among others) US citizens resident in Canada, if they did not take part in an “amnesty” program that was being offered by the US Internal Revenue Service (IRS).   The program expired September 9,2011.

The official objective of the “amnesty” program (officially known as the 2011 Offshore Voluntary Disclosure Initiative  – or 2011 OVDI) was to bring US persons that have used undisclosed foreign (non-US) accounts and undisclosed foreign entities to avoid or evade US tax, into compliance with United States tax laws.     However the program was, in effect, much broader than that.    It provided an opportunity for US citizens and others who had not complied with US tax requirements to “become legal” with, in many cases, a substantially reduced penalty compared with what otherwise would have applied.

The enormous publicity over the program in the Canadian financial media alerted (although in some cases just reminded) many noncompliant US citizens (and green card holders) living in Canada of the vast array of US tax reporting obligations to which they are subject, and the potentially drastic penalties which can apply in the case of noncompliance.

The requirements do not end with the simple need to file a US income tax return.     There are numerous additional US tax reporting requirements apart from computing tax on a tax return.

For example if you own or have signing or other authority over non-US financial accounts during the calendar year that aggregate in excess of $10,000 you must file US Treasury Form TD F 90-22.1 with a potential penalty of $50,000 or more for each account for late filing.   Financial accounts include bank and securities accounts, RRSPS, RRIFs, LIRAs, LIFS, RESPs, TFSAs, and the like, as well as equity in life insurance policies.

A separate form must be filed by those who have certain non-US trusts.  Apart from your involvement with a “normal” Canadian trust, this requirement may affect you if you have an RRSP, RRIF, LIRA, LIF, RESP, or TFSA, for example.  Failure to timely file can result in a penalty of 35% of the amount of the contribution to, or distribution from, the trust, or 5% of the amount in the trust   The minimum penalty is $10,000.

US citizens with Canadian private corporations generally must file another IRS Form for each corporation, which attracts a potential $10,000 penalty for late filing for each corporation.  A similar form and penalty applies for late disclosure of certain interests in Canadian partnerships.   Yet another penalty applies if you contribute property to your Canadian corporation without timely reporting the contribution.

The above are just examples of a few selected circumstances where US tax reporting obligations may apply to you.  Additional requirements with penalties are being introduced for the 2011 tax year.  Please consult your tax advisor for assistance in helping you avoid unexpected penalties.

*Mr. Brunton, based in Boca Raton, FL., can be reached at rb@taxintl.com

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