Are You A U.S. Person? The Answer May Be Yes

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Have you been asked lately if you are a U.S. Person? On the surface you might be quick to say no, but you may have ties to the U.S. that you did not know you had. In this edition of The Martens Report we are discussing the new U.S. legislation that has come out, called The Foreign Account Tax Compliance Act (FATCA), and how to determine if it affects you.

What is FATCA? We would like to bring you up to speed on what this new law is all about. FATCA was signed into U.S. law in March 2010. Its aim is to prevent “U.S. persons” from hiding money in accounts outside of the U.S. to evade taxes. On February 5, 2014, Canada and the U.S. signed an intergovernmental agreement (IGA) regarding FATCA. Under that agreement, Canada agreed to pass laws requiring financial institutions to report annually to the Canada Revenue Agency (CRA) on ‘reportable accounts’ (i.e. specified accounts held by U.S. persons). The CRA will forward this information to the Internal Revenue Service (IRS) under the provisions and safeguards of the Canada-U.S. Tax Convention.

Canadian tax regulations related to FATCA came into effect July 1, 2014. Who are U.S. Persons? This is the question we are aiming to answer for everyone today. The term “U.S. Person” has caused a bit of confusion amongst Canadians, particularly for “snowbirds” who head to the U.S. to escape our cold winter months. Many might think that since you’re only in the states for 4-6 months (or for the maximum 182 days) this won’t apply to you, however it might. According to U.S. tax law, you may be considered a U.S. person if you are:

  • A citizen of the U.S. (including an individual born in the U.S. but resident in Canada or another country, who has not renounced U.S. citizenship)

  • A lawful resident of the U.S. (including a U.S. green card holder)

  • A person residing in the U.S.

You may also be considered a U.S. person if you spend a considerable amount of time (or have substantial presence) in the U.S. on a yearly basis. These people could be identified by their bank or any financial institution in Canada as potentially being U.S. account holders because of information associated with their account, such as an alternate U.S. address or telephone number on file. Their financial institution may also ask them to provide documents showing that they are not U.S. residents or U.S. citizens.

Generally the test for “Substantial Presence” is as follows:

If the total number of days you spent in the U.S. during the current year + 1/3 of the days you spent there last year + 1/6 of the days you spent in the year before that, = 183 days or more, then you are a U.S. Resident “for tax purposes."

The way the math works, you can spend up to 120 days each year in the U.S. without crossing this threshold. When calculating the number of days, you should know that a partial day in the U.S. counts as a full day, although you can exclude days that you were in transit in the U.S. (for less than 24 hours) on your way to another foreign country.

In case you are considered a U.S. resident, you can apply to extricate yourself from the U.S. by either claiming the "closer connection exception" allowed under the U.S. Internal Revenue Code, or claiming a treaty exemption under the Canada-U.S. Tax Treaty.To claim the "closer connection exception" under the Code, you have to establish that you:

  • Maintain a permanent home in Canada (no need to own; you only need continuous access), as well as personal belongings

  • Have family in Canada

  • Are employed or carry on business in Canada

  • Do banking and hold investments in Canada

  • Vote in Canada

  • Participate in social or religious organizations in Canada

You cannot, however, claim this exception if you spend more than 183 days in the U.S. in the current year or if you have applied for a green card. If you are found to be a U.S. Person you will be required to file tax in the U.S. on your worldwide income much in the same manner as a U.S. citizen.

What does this mean for you?

Getting back to the Intergovernmental agreement (IGA), you might be curious to know what this means for Canadians and our accounts in Canada? Well, financial institutions are required to report on most types of financial accounts held by U.S. persons, including bank, mutual fund, brokerage and custodial accounts, annuity contracts and some life insurance policies that have an investment or savings component.The following registered plans however are exempt from reporting:

  • Registered Retirement Savings Plans (RRSPs)

  • Tax Free Savings Accounts (TFSAs)

  • Registered Disability Savings Plans (RDSPs)

  • Registered Pension Plans (RPPs)

  • Registered Retirement Income Funds (RRIFs)

  • Pooled Registered Pension Plans (PRPPs)

  • Registered Education Savings Plans (RESPs)

  • AgriInvest Accounts

  • Deferred Profit-Sharing Plans (DPSPs)

Yet this does not affect a U.S. person’s obligation to report income earned in any of these plans on their U.S. tax return where required. Are governments allowed to share information about their citizens? Tax information sharing is nothing new and it is part of a new global reality. The G20 has stated publicly that the best method of addressing tax evasion internationally is through the expanded use of tax information sharing, and the G20 has started to develop “a new single global standard for automatic exchange of information.” Canada and the U.S. already have a tax information sharing arrangement in place where Canadian tax authorities provide information to U.S. tax authorities on U.S. residents earning income in Canada, and vice versa. The IGA extends this to also include U.S. taxpayers who are residents of Canada. What does it mean for HollisWealth and for our clients? We expect Canadian tax regulations related to FATCA to have no impact on the vast majority of our clients. If information you have provided for our records indicates that reporting may be required for your accounts, we will be required to ask you to provide additional information – possibly in the form of new documentation regarding your U.S. tax status. We will then review the information you provide against the applicable requirements to determine whether or not your accounts need to be reported. We have always been committed to keeping our clients' personal information accurate, confidential, secure, and private. Our response to the Canadian tax regulations related to FATCA will be held to our standard of strict compliance with Canadian privacy laws, and our approach will reflect our longstanding commitment to client privacy and client service. For more information about FATCA and the IGA, please see below for additional links. FAQ About FATCA & IGA | Canada Revenue Agency Canada: Snowbird Tax Traps | Samantha Prasad | Mondaq If you have any additional questions regarding the IGA or FATCA then please don't hesitate to contact us at our office. We hope that we have been able to simplify some of this information for you and answer any questions regarding this new legislation and how it applies to you.

Hope you have a great long weekend. Andrew and Peter

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