Ocean Mist

Posted by Tax Consultants



The Foreign Account Tax Compliance Act became U.S. law in March 2010 but will take effect around the world on July 1, 2014. The goal of the law is to find offshore accounts held by U.S. taxpayers seeking to avoid paying taxes on them.mk change

Under the law, banks from around the world will be asked to filter through their accounts to look for clients with U.S. connections, then share that information with the U.S. Internal Revenue Service.

Who is affected by this law?

Almost every Canadian. Many dual citizens in Canada comply with U.S. rules requiring them to file taxes every year. That’s because the U.S. is one of two countries in the world that taxes people based on citizenship instead of residence.

But some residents didn’t know until recently that they were dual citizens. For example, U.S. citizenship is automatically given to people born in Canada to U.S. parents or born in the U.S. to Canadian parents.

Also, the U.S. sees registered savings accounts like RDSPs, RESPs and TFSAs as “offshore trusts,” and therefore can potentially tax gains in them.

To date, more than a dozen countries and several jurisdictions have signed one of the possible agreements with the U.S., many of them inking deals in the past few months. The majority signed intergovernmental agreements in which their banks will give information about U.S.-related accounts to their national tax authorities, who will then pass it along to the IRS.

This list includes Britain, Denmark, France, Mexico, Costa Rica and the Cayman Islands.globes MK & Associates

Only two countries Japan and Switzerland signed a different agreement that allows banks to report information directly to the IRS, rather than have it go through their national government.

Dozens of countries are either in negotiations, like Canada, or exploring their options. Experts say no bank or country will remain untouched.

If banks refuse to hand over lists of client accounts with U.S. ties, both clients and banks face “very severe” penalties, the CBA points out.

Penalties for banks and customers include a 30 per cent withholding tax on all U.S. source income and the sale of U.S. securities.

Starting on July 1, new rules will be put into place to help identify which accounts are “U.S. Reportable Accounts.”

Over 2014 and 2015, the financial institutions will be checking through their accounts to figure out which ones are “U.S. Reportable Accounts” meaning which ones are owned by a U.S. person or corporation.

A system will be developed to do this that will look for indicators of U.S. connections, such as U.S. birthplace, U.S. addresses or phone numbers, an American power of attorney, or standing orders to transfer funds to the U.S.

Financial institutions can also flag individuals if they have any reason to believe they are a U.S. citizen.

Accounts under $50,000 will be deemed compliant unless a bank has reason to know the client has U.S. status. Accounts above $50,000 will get flagged if any electronic data on hand indicates U.S. connections.

Those deemed U.S. persons will be asked to complete a special taxpayer identification and certification form.MK Law

Starting in March 2015, banks will begin annually sending information about those accounts to the IRS, either directly or through the Canada Revenue Agency, depending on the agreement the federal government signs.