Special Voluntary Disclosure Initiative of Offshore Accounts

[obadiah]

For people way more knowledgeable than I.

I have a friend all in a dither about reporting for the titled initiative. For the last 30 years she has been a teacher at a school district near Toronto. One of her message boards got her all spun up about how Uncle is coming after her any time now. Her only assets are a house and an RSP (Retirement Savings Plan) worth about $75,000 through the school district. Apparently a lot of expats are a little nervous about this.

Per the definition,

Offshore
This term, when used in this context, and when referring to a country, means a jurisdiction that offers financial secrecy laws in an effort to attract investment from outside its borders. When referring to a financial institution, "offshore" refers to a financial institution that primarily offers its services to persons domiciled outside the jurisdiction of the country in which the financial institution is organized.

This would not appear to my eyes to apply to Canadian bank and retirement accounts.

Also, Report of Foreign Bank and Financial Accounts has come up. The definition of who must file is below:

Who Must File an FBAR.
A United States person that has a financial
interest in or signature authority over foreign financial accounts must file
an FBAR if the aggregate value of the foreign financial accounts
exceeds $10,000 at any time during the calendar year. See General
Definitions, to determine who is a United States person.

Does this really cover expats who have been away for many years and has checking, savings and retirement accounts in that country? Does she have to go back and file 10-20 years of reports?

Any insight would be greatly appreciated.

[Arthur Rubin]

For people way more knowledgeable than I.

I have a friend all in a dither about reporting for the titled initiative. For the last 30 years she has been a teacher at a school district near Toronto. One of her message boards got her all spun up about how Uncle is coming after her any time now. Her only assets are a house and an RSP (Retirement Savings Plan) worth about $75,000 through the school district. Apparently a lot of expats are a little nervous about this.

Per the definition,

Offshore
This term, when used in this context, and when referring to a country, means a jurisdiction that offers financial secrecy laws in an effort to attract investment from outside its borders. When referring to a financial institution, "offshore" refers to a financial institution that primarily offers its services to persons domiciled outside the jurisdiction of the country in which the financial institution is organized.

This would not appear to my eyes to apply to Canadian bank and retirement accounts.

I don't think it applies to Canada, either.

Also, Report of Foreign Bank and Financial Accounts has come up. The definition of who must file is below:

Who Must File an FBAR.
A United States person that has a financial
interest in or signature authority over foreign financial accounts must file
an FBAR if the aggregate value of the foreign financial accounts
exceeds $10,000 at any time during the calendar year. See General
Definitions, to determine who is a United States person.

Does this really cover expats who have been away for many years and has checking, savings and retirement accounts in that country? Does she have to go back and file 10-20 years of reports?

Yes. Well, at least 7 years, although penalties may apply for earlier years, as well. My understanding is that Treasury (not the IRS, as FBARs are not filed with the IRS) considers 7 years back filing a good faith attempt.

[Kestrel]

Start here (IRS Website links):

Canadian & U.S. Tax Issues
Publication 54: Tax Guide for U.S. Citizens and Resident Aliens
Publication 597: Information on the United States - Canada Income Tax Treaty
Publication 514: Foreign Tax Credit for Individuals

The enforcement effort underway which has you concerned is primarily intended to catch individuals who are using foreign accounts to completely escape tax liability. Generally speaking, US citizens are subject to US income tax on all their worldwide income. However credits against US tax liability can be claimed for taxes paid to foreign countries.

I'm presuming that your friend has filed tax returns and paid taxes in Canada for all these years. Depending on the particulars, there may not be much reason for concern. However, you should still anticipate filing US tax returns documenting that Canadian taxes were paid.

You should consult a tax accountant or tax attorney who specializes in cross-border issues.

[obadiah]

Thanks a bunch for the assist. She's working with a tax lawyer to get her filings straight. The biggest travail is finding all the old records.

[Arthur Rubin]

I'm afraid the FBAR penalties (or, at least, so I'm told) are more severe, and may be more than 20% of the accounts not reported.

In regard income taxes, your friend may file US income tax returns using the foreign earned income exclusion if there would be no US tax due after that exclusion. Requirements:

1. Total earned income must be less than the exclusion amount for that year (currently, US$94100, I believe)
2. 1. Must be a bona fide resident of Canada for the entire calendar year in question, or
   2. Only 35 days could be spent in the United States in the calendar year (with modified exclusions if there are 330 days spend outside the US in a non-calendar year of 365-366 days)
3. Total unearned income (interest, dividends, capital gains, etc.) must be less than the standard deduction plus the personal exemption amount for that year. (In other words, disregarding the excluded earned income, no tax is due.)

I've been told, although it's not actually in the code, that if you go back 7 years, they won't ask for further tax returns. You can probably use the annual average exchange rate to convert your CDN$ income into US$, for the purpose of the calculations.

If there is any tax due, you can't use the foreign earned income exclusion on late returns, so you'll have to use the foreign tax credit, as described in Kestral's post. You will probably need a tax advisor specializing in US-foreign tax returns, probably US-Canada, although it's likely that there would be no tax due, as Canadian tax rates are generally higher than US tax rates. The general rule is that, if all your income is both Canadian as resident and US as citizen, and there is no US-sourced income, that you can subtract the Canadian Federal tax from the US tax, and, if there is any left, you would have to pay the difference. (This is confused by the fact that you have to calculate tax on earned and unearned income separately, so you would need to file two form 1116s with each 1040, and the odd formulas for allowing for the reduced US tax rate on capital gains and "qualified dividends" provide many opportunities for error.) Another advantage of Canada (and Mexico) is that most of your dependents for Canadian purposes are probably dependents for US purposes.

I have a domestic problem to deal with, so I probably won't be back for a few hours. I may be able to prepare some of the returns, if your friend is interested.

[Kestrel]

Thanks a bunch for the assist. She's working with a tax lawyer to get her filings straight. The biggest travail is finding all the old records.

You said your friend has been a schoolteacher in Toronto for 30 years. Has she been living on the Canadian side of the border also, and NOT maintained a US residence?

If she has taken an action to renounce her US citizenship, and has spent less than 30 days in the US in each of the last 10 years, the Expatriation clause in the tax code needs to be taken into consideration. You'll find it in Chapter 4 of IRS Publication 519: US Tax Code for Aliens.

[Cathulhu]

Remember when the two African embassies were blown up by terrorist bombers? I left on my own embassy tour a couple of months later, and spent seven weeks working out of the Tokyo Embassy, Hong Kong Consulate, and the American Institute in Taiwan. I did masses of expat returns for people who were learning the hard way the same problem your friend is. From the situation you've described, it is EXTREMELY unlikely that your friend will owe US taxes if her returns are correctly prepared. However, you have to file to establish this; IRS will emphatically NOT accept "well, I made more than the filing requirement but I won't owe so let's just skip the whole thing." YOU MUST FILE TO USE THE EXCLUSION. The foreign earned income exclusion will help on the latest years, but there are time limits on how long you have to file for it! Fortunately, this has been extended by regulation: this is an excerpt from Pub. 54 (easily found on IRS website):

The foreign earned income exclusion is voluntary. You can choose the exclusion by completing the appropriate parts of Form 2555.

When You Can Choose the Exclusion

Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns.

A return filed by the due date (including any extensions).

A return amending a timely-filed return. Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid.

A return filed within 1 year from the original due date of the return (determined without regard to any extensions).

You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion.

If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. You must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1.911-7(a)(2)(i)(D).


The exclusion is her best ticket out of the mess. Arthur is correct in the information he's provided; unlike him I do not offer to assist with the preparation of the tax returns, because frankly you can't afford me.

[jcolvin2]

I'm afraid the FBAR penalties (or, at least, so I'm told) are more severe, and may be more than 20% of the accounts not reported.

Under the OVDI, for longtime expats, who resided and paid taxes in a foreign country during the 2003-2010 years, and who did not have more than $10k/year of US sourced income, the penalty is 5%, rather than 20%.

Under the US-Canada tax treaty, you can make an election to defer recognition of income on RRSP until the time of distribution, rather than recognizing income on year-by-year accruals. It may be worth investigating the possibility of a PLR allowing for a late election.

[obadiah]

Thanks, all. I forwarded the info on so she will be better prepared when she meets with her attorney. I'll update as time goes by.