Janet Selby never imagined she was anything other than a Canadian.
After all, she has lived in Canada for all of her 47 years. She went to school here, voted in elections, travelled on a Canadian passport and built a successful career as an accountant and corporate recruiter.
But a recent call from her online broker forced her to confront a long-forgotten past. Ms. Selby spent the first four days of her life in the United States, born in 1963 to two Canadians pursuing graduate work at the University of Illinois in Champaign, Ill.
That makes Ms. Selby an accidental American – a reality that comes with sweeping tax and reporting obligations that could now cost her thousands of dollars and a monster headache.
“It’s frustrating,” Ms. Selby said from Toronto, where she has lived most of her life. “I’m a responsible citizen. I’ve paid my taxes dutifully since I’ve been earning money. It makes me feel like it’s an overreaching tax grab by the Americans.”
Ms. Selby is not alone. Hundreds of thousands of Americans living in Canada may soon run into the increasingly long and muscular arm of the U.S. Internal Revenue Service. Many aren’t aware of what is about to hit them as Canadian financial institutions comply with a new law that requires them to identify their U.S. customers to the IRS, tax experts warn. Banks and customers who fail to provide the information would be hit with steep penalties on all their U.S. income.
Unlike almost every country in the world, the United States taxes its citizens based on worldwide income, regardless of where they live.
And now an aggressive campaign to root out tax cheats and tax havens is reaching deep into Canada and other countries. Starting in 2013, the IRS will require foreign financial institutions – banks, brokers, insurers and the like – to disclose all accounts held by U.S. citizens and green-card holders.
But that’s not the end of it. Those caught up by the sweep of the U.S. Foreign Account Tax Compliance Act, or FATCA, will likely have to file U.S. tax returns and detailed annual foreign account disclosure statements, going back years. Getting rid of a U.S. citizenship – accidental or not – doesn’t eliminate past tax obligations to the IRS.
“There are a lot of people who don’t even know they have an issue,” warned Beth Webel, a tax partner at PwC Canada in Hamilton, Ont., one of the accounting firm’s experts on the new U.S. rules.
“There are people who didn’t know, or just didn’t file. Those are tough conversations to have with people. There’s no easy way to deal with it.”
Relatively few of these Americans and dual citizens are the kinds of tax cheats the IRS insists it’s hunting for. They’re ordinary people who’ve been paying taxes that are typically higher than in the United States.
They are also children and spouses of Canadians who spent significant chunks of their lives working in the United States as permanent residents, who may not even know they have a lifelong obligation to Uncle Sam by virtue of their family’s U.S. ties.
The experience of Anthony Smith of Kelowna, B.C., highlights another group of Canadians at risk: long-term green-card holders. Mr. Smith spent 11 years working as a network designer for Nortel Networks in Dallas. Ending his obligations to the IRS after he surrendered his green card and returned to Canada in 2004 took years and cost him thousands of dollars.
“There’s a triangle of security, immigration and accounting, and in there you can get totally lost,” Mr. Smith said.
The new U.S. law will ultimately force vast numbers of Canadians to start filing with the IRS, Ms. Webel said. “They’re going to be on the radar screen,” she said.
