Tax Issues for American Citizens Living in Canada: FATCA

Shlomi Steve Levy for Altro Levy writes: Altro Levy has been closely following the implementation of the U.S. Foreign Account Tax Compliance Act(“FATCA”) in Canada. In February, I blogged about the intergovernmental agreement (the “IGA”) between the Canadian and American governments; under the IGA, Canadian financial institutions share information on bank accounts held by U.S. persons that are worth $50,000 USD or more with the Canada Revenue Agency rather than directly with the IRS, which would have violated Canadian privacy laws. (For more information on the details of the IGA, which was signed on February 5, 2014, read our blog on the pros and cons of the IGA here.) FATCA continues to be prominently featured in the news as American citizens living in Canada rail against FATCA and the IGA.

While some Americans living abroad would rather renounce their U.S. citizenship than be subject to FATCA, others are taking a different approach. Virginia Hillis and Gwen Deegan are U.S. persons living in Canada who have filed a lawsuit against the Canadian Attorney General. Hillis and Deegan, who were both born in the U.S. but left when they were five years old, claim that the IGA is unconstitutional for a variety of reasons, including the fact that it violates certain rights protected by the Canadian Charter of Rights and Freedoms, such as the right to life, liberty and security of the person and the right to be secure against unreasonable search and seizure. The pair claim that the IGA also discriminates against U.S. persons solely due to their national origin and country of citizenship. They argue that the IGA allows overly broad U.S. tax laws to reach Canadian citizens and that sharing personal bank account information is a violation of privacy.

FATCA’s primary goal was to find offshore bank accounts sheltering U.S. resident money, but the legislation casts a wide net that ensnares U.S. persons living abroad, forcing foreign governments to provide information on U.S. citizens, some of whom may be “accidental Americans” like Hillis and Deegan, who have never filed U.S. income tax returns and are therefore not compliant with the U.S.’s citizenship-based taxation regime.

Whether Hillis and Deegan’s lawsuit will be successful remains to be seen; it is likely that it will take years of litigation before the suit comes to a close in the courts. Until then, U.S. persons should become aware of the rules of the U.S. citizenship-based taxation regime.

While renunciation of U.S. citizenship might be a strategy for some, the U.S. recently raised the fee for renunciation from $450 to $2350, and, in order to renounce citizenship, U.S. persons must generally be tax-compliant for up to five years prior to renouncing.

Information-sharing between Canada and the U.S. will begin in 2015. U.S. persons living in Canada should contact their team of cross-border advisors as soon as possible to ensure that they are compliant with U.S. law and to find the most advantageous tax planning solution to deal with FATCA based on their own specific facts.