2. Amnesty: The IRS recently opened a new permanent Offshore Voluntary Disclosure Program. The program, which requires eight years of back filing, is aimed mainly at Americans “hiding” offshore accounts. It means paying mandatory penalties of up to 27.5 per cent, plus any taxes and interest owing. The good news is that if you live in Canada and can show you aren’t hiding anything, the penalty could be as low as 5 per cent of assets held offshore.
3. Soft Disclosure: Just start filing, as if the years prior to 2011 didn’t exist. This is a low-cost option, but it could come with significant risk. The IRS has warned that it won’t look kindly on tax cheats who try to slip into the system this way.
4. Do nothing: This is the lowest-cost option, but it comes with unknown risks. Finance Minister Jim Flaherty has made it clear that Canada won’t collect taxes for the IRS. But starting in 2014, the IRS will begin demanding that Canadian financial institutions start identifying their American clients or face steep penalties in the United States under the Foreign Account Tax Compliance Act.
5. Renounce your citizenship: This could be the most costly route of all. First you’ll have to make peace with the IRS. And for some high-wealth individuals, there’s an extra exit tax on all your worldwide assets. But once you’re out, you’re out – no more FBARs, no more IRS.
With files from reporter Sean Silcoff
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THE TFSA TRAP
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Americans living in Canada that have been swept up in the recent tax crackdown by the U.S. Internal Revenue Service shouldn’t invest in tax-free savings accounts, an Ottawa tax specialist says.
Since 2009, Canadians adults have been able to contribute up to $5,000 a year to a TFSA and not pay tax on any investment income earned by those contributions.
But Martha Skeggs, director of taxation services with McLarty & Co., an Ottawa accounting services firm, says the IRS doesn’t recognize TFSAs because there is nothing in the income tax treaty between Canada and the U.S. about them. As a result, the IRS treats TFSAs as foreign trusts, and American filers in Canada have to report income they have earned in the accounts to the IRS.
Ms. Skeggs notes that some people in this situation may not have to pay much tax to the IRS in the initial years of investing in a TFSA, but the amounts payable grow as the size of the amount in the account grows.
Then there’s the paperwork. Filers have to fill out two IRS forms, about 10 pages in total, about the trusts; penalties for not doing so are significant, a minimum of $10,000 (U.S.) per form, per year. Hiring an accountant to handle the paperwork can cost several hundreds of dollars – eating up most or all of the profits earned inside the shelters – on top of the tax filings and reports on foreign financial accounts they are already required to file with the IRS. “It’s a lot of work,” Ms. Skeggs says.
As a result, she’s been counselling most of her clients against investing in TFSAs, and roughly two dozen have followed suit. “It can be complicated and people think it’s not worth it. For many of them, when you explain the rules, they’re deciding to cash out of [their TFSAs]. They’re deciding it doesn’t make sense to contribute to TFSAs at this point.”
Sean Silcoff
