The new tax on investment income, introduced to help pay for Barack Obama’s health care reforms, may create a new incentive for people to take advantage of an amnesty program for people who have not been filing with the IRS.BRIAN SNYDER/Reuters
The roughly one million Americans living in Canada have another reason to fear the U.S. Internal Revenue Service: a new U.S. health care tax.
Many wealthier Americans are about to be hit with a new 3.8-per-cent tax on their investment income, introduced to help pay for U.S. President Barack Obama's 2010 health care reforms, known as Obamacare.
"Welcome to the new era, where the U.S. government is desperate for money," said accountant Kevyn Nightingale, a U.S. tax expert at MNP LLP in Toronto.
"It may very well turn out to be a way to get Americans abroad to pay for Medicare."
The so-called net investment income tax takes effect in the current tax year. Mr. Nightingale estimated that tens of thousands of Americans living in Canada could be affected.
And many could find themselves owing money to Uncle Sam for the first time.
The problem arises because, under U.S. law, Americans must file tax returns every year with the IRS, regardless of where they live and work.
These people typically do not owe any U.S. tax if they live in a country such as Canada, where taxes are higher.
The catch this time is that people will not be able to offset the new tax by applying foreign tax credits because of the way the U.S. law was drafted, tax experts warn.
The new tax targets high-income earners – a single person earning at least $200,000 (U.S.) per year, or $250,000 for a married couple filing jointly. The new levy would also hit capital gains in excess of $250,000 ($500,000 for married filers), such as the gain on the sale of a house.
The tax creates a unique dilemma for the many Americans in Canada who have not filed with the IRS for years.
"Remember all these people who haven't filed? They didn't owe any tax before," Mr. Nightingale pointed out. "Now they're probably going to be in a position where they owe tax."
The tax may create a new incentive for people to take advantage of a streamlined U.S. amnesty program for people who have not been filing with the IRS.
Under the program, people can get up to date with the IRS by filing only three years of back taxes – as long as they owe less than $1,500 a year.
The new tax could put some individuals over that threshold, making them ineligible for the amnesty from 2013 onward, said Ian Macdonald, a U.S. tax expert with PricewaterhouseCoopers in Toronto.
"That [amnesty] may be in jeopardy now. People may not be able to use it," he said. "I would hope that most people would [choose to] get through this streamlined process now."
The situation is further complicated by new, higher U.S. income tax rates that also kick in this year, pointed out Jim McConnery of Welsh LLP in Ottawa.
That could mean some expatriates owe U.S. taxes for the first time.
Peter Megoudis, a partner with Deloitte & Touche in Toronto, said the Obamacare tax is the latest measure making life increasingly uncomfortable for expatriate Americans in Canada – particularly those who have been ducking their legal obligation to file with the IRS every year.
"There really is a perfect storm gathering for Americans living outside the U.S.," Mr. Megoudis said.
Canadian and U.S. officials are sharing much more tax information than ever before.
There are steep penalties for failing to file various new documents required of Americans who have accounts outside the country.
And under a new U.S. law, the Foreign Account Tax Compliance Act, Canadian financial institutions are expected to start red-flagging U.S. account holders starting in 2014.