Dual Canadian-US Citizens: What You Need to Know About Changing US Tax Rules

Changing US Tax Rules

Are you a Canadian holding dual U.S. citizenship, or an American dwelling in Canada? You may soon come under fire for non-compliance with the IRS, whether or not you owe money on U.S. taxes.

As of July 1, 2014, a new law called the Foreign Account Tax Compliance Act (FATCA) will come into effect, targeting U.S. tax evaders living outside the country with substantial holdings in foreign bank accounts.

According the IRS website, “Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons.” This means banks outside of the U.S., including those in Canada, could hand over any financial information to the IRS of customers who have links the U.S. and those customers could be subject to tax levies.

Why Do I Owe U.S. Taxes?

The United States employs a method known as worldwide taxation, meaning U.S. persons (citizens, green card holders and long-time residents) must declare all income received annually from anywhere in the world to the IRS, or risk being in breach of tax compliance laws. This applies even to persons who don’t live and work in the U.S., such as those who inherit dual citizenship from their parents. Eretria is the only other country in the world that uses this practice.

New Rules Forgive Past Tax Penalties

While the IRS states “more than 45,000 taxpayers have come into compliance voluntarily” under the Offshore Voluntary Disclosure Program (OVDP), accounting for about $6.5 billion in taxes, not everyone living abroad bothers to comply.

Now, in order to encourage more expatriates to come forward before the July rule change, the IRS is softening the penalties for not filing in the past – which could have net you a fine of up to $10,000 each year. The IRS claims the streamlined OVDP process will help U.S. persons become tax compliant and forgive penalties to those who “non-willfully” didn’t file in previous years.

These changes include:

  • Elimination of a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  • Eliminating a required risk questionnaire;
  • Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.
  • For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 per cent of the foreign financial assets that gave rise to the tax compliance issue.

Tax-Sheltered Savings At Risk Under New Rules

While a softening of the rules seems like a positive change, one Toronto-based lawyer calls them “bogus”, and says the new offshore procedures will be costly to Americans, whether they comply or not. John Richardson, also a dual Canadian and American citizen, helps American expatriates navigate what he calls a “”vicious and unjustified” tax process. He says these changes to the OVDP simply put people in the IRS’s system, and will force them to file every year for the rest of their lives.

Tax sheltered savings like RESP, TFSA and tax free capital gains are subject to taxation under U.S. rules. According to Richardson, the best thing a young Canadian holding dual citizenship can do to save money is renounce their U.S. citizenship, if they have no plans to live or work in the U.S.

Canadians holding any kind of U.S. connection, for example citizenship, green card holders, property owners, or snowbirds who spend time down south each year, should contact a lawyer to figure out their options.

A Summary of OVDP Tax Changes

If you are an American living in Canada here’s what is changing in the process to become tax compliant:

  • Requiring additional information from taxpayers applying to the program;
  • Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
  • Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  • Enabling taxpayers to submit voluminous records electronically rather than on paper;
  • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.



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