The Isaac Brock Society does not endorse tax professionals. However, I have been able to provide the following content, with permission, from Moodys LLP, tax advisors blog. It provides a useful summary of what FATCA will require the FFIs to do to detect the accounts of US persons.
On February 08, 2012 the IRS issued IR 2012-15, which contains proposed regulations that clarify the manner in which non-US financial institutions will find and report US persons to the IRS, which is required by the Foreign Account Tax Compliance Act (FATCA), enacted by the US Congress in 2010. The new regulations set forth: a) the type of information the financial institution will search for; and b) the manner in which it will search for that information.
Information the Financial Institution Will Search For
In order to determine whether an account holder is a US person, the financial institution is required to search for the following specific items:
- Identification of the account holder as a US person;
- Whether the account holder was born in the US;
- Whether the account holder has a US address or US telephone number;
- Whether there are instructions to transfer funds to an account maintained in the US; and
- Whether power of attorney or signatory authority has been granted to a person with a US address or telephone number.
If any of the foregoing are present, the institution must require the account holder to complete a US information report (form W-9) and that report will be submitted to the IRS. If the report is not completed, or the account holder refuses to comply, then the institution will be required to withhold 30% of any distributions to the account holder and remit that amount to the IRS.
Manner in Which the Financial Institution Will Search For This Information
The manner in which the institution must search for indications that an account holder is a US person depends on the balance of the account, whether the account is new or existing, and whether the account holder is an individual or an entity.
Existing accounts held by individuals
- The financial institution is not required to conduct a search provided the account had a balance of less than $50,000. However, if the financial institution decides to make an inquiry, it must follow the methodology described below.
- If the account balance is at least $50,000 but less than $1,000,000, the financial institution must review its electronically searchable data for the information listed above.
- If the account balance is $1,000,000 or more the financial institution must review its electronically searchable data for the same indications listed above. In addition, however, the institution is obligated to search all non-electronic files for the same information, including interviewing any relationship manager associated with the account.
New accounts held by individuals
When an individual opens a new account, the financial institution will be required to review all information provided when opening the account under appropriate know-your-customer and anti-money laundering rules. Accordingly, the institution will generally not need to make significant changes to the information collected during the account opening process in order to identify US accounts, except to the extent that the above-referenced information is identified.
So what does this mean for the US citizen who is resident in Canada? First, if the individual meets the thresholds under a preexisting account he may or may not be asked by the financial institution if he is a US citizen. Second, when the individual opens a new financial account in the future he will most likely be asked for his place of birth, a copy of his passport, or asked about ties to the US.
As stated in our previous blogs, on January 09, 2012 the IRS extended the Offshore Voluntary Disclosure programs indefinitely for US citizens who live abroad and who are not current on their US tax obligations. The penalties for taxes and non-filing are draconian, and do not appear to be going away. Those who have not brought their filings current should act quickly before FATCA compliance becomes effective.
This post offers an interesting means by which a US person can avoid detection. (1) Open the account before a bank starts implementing the rules on new accounts; (2) keep the account balance below $1,000,000, provided that you’ve never given your bank any information about your place of birth or citizenship.
There is a loophole in this procedure, big enough to drive a truck through, to detect US citizen living abroad. No mention is made of questioning the person born abroad if they are US citizens. There are no questions to determine whether persons born abroad were born to a US citizen parent. There are an unknown number, but it is not insigificant, who are in this category. There are many in Canada abd I have met them all over the world in my pre-retirement business travels. Even though they speak no English, have never held a US passport, were never registered at a US consulate by the US parent, have no Social Security number, have never lived or even visited the US; such persons are US citizens and subject to the exaxt same tax rules as persons born in the US. Doesn’t the IRS know this?
One additional comment/question: I wonder how Commissoner Shulman can justify concessions for US citizens living in Canada wthout also making these same concessions available to US citizens resident in other countries that are in exactly the same boat? To paraphrase George Orwell, are some more equal than others?
@ roger As far as I can tell these regulations that Roy summarizes are not Canada specific, but world-wide.
@Everyone
Again I’ll mention as matter of Canadian law Canadian banks cannot ask for this information from their domestic customers and as of now the current Canadian government has given no indication they intend to change these rules. People like Steven maybe correct in saying in the major Canadian banks and their shareholders may bring a huge amount of pressure on the Canadian government to change these rules but I would say given Flaherty’s pronouncements up to now I would say its a very open question as to whether they would be sucessful.
Could someone please clarify if this means if you keep several accounts at the same financial institution, but keep each of them under $50,000 you can escape the search procedure?
@Everyone
I wish Roy Berg and Moodys studied the Canadian Bank Act more instead of just trying to drum up more business.. There is this assumption that whatever the US wants the US gets I am not sure that is the case in Canada.
Does anyone know if the $50,000 in an account means the total of all accounts with a FI or if it is each individual account there? My RRSPs and other retirement savings, which I will be drawing on in a few year are more than $50,000 combined, but there is less than $50,000 in any one account.
In addition, I still don’t get how Canadian banks, under various Canadian legislation–Human Rights, Charter of Rights and Freedoms, Bank Act, privacy legislation, etc. can demand to know where I or anyone else was born. They do not have any of that information on record and none of the acceptable ID under the Bank Act provides that information. A birth certificate can only be used if it is a Canadian birth certificate. Is a foreign (US) law going to take priority over Canadian laws, including the Canadian Constitution? I very much doubt it.
I have been listening to comments on TV and reading aboutt the proposed legislation by the Harper government:
“… that, among other things, will allow police forces to acquire your mobile number, your email address, and your IP address without a warrant. This has privacy commissioners across the country deeply concerned.” (http://www.theglobeandmail.com/news/politics/john-ibbitson/if-you-worry-about-online-privacy-pay-attention-to-this-debate/article2315486/)
This seems to me to be so similar to what the banks will be doing to Canadians born in the US by allowing the banks to send all of our private banking info to the IRS, without a warrant and assuming we are all tax cheats and criminals. I wish we’d get the same outrage and response in the media and the same attention from the privacy commissioners.
@Yelyac Jim Calvin (a Deloitte guy based in Singapore) seems to think so. I’m trying to figure out whether the regulations explicitly say this, or whether this is just the advice he’s giving to his customers.
@Everyone
Between thirty to fourty percent of Canadian don’t have passports. Is the Canadian government really going to make all these people get one just to open a bank account.
@ Yelyac and @ Blaze, there is a rule that requires all acounts at the financial institution to be aggregated for purposes of the dollar threshold.
@ Tim I am not a CDN lawyer.It seems to me, however, if FATCA were so clearly unenforceable under CDN law there would be little outcry from the financial institutions, they would simply refuse to comply. That does not seem to be the case to me.
@royaberg
I would argue the outcry IS because there is such a conflict of laws between Canada and the US. FATCA isn’t so much a law but a witholding tax on US source income applicable to non compliant FFI. To the existent that foreign institutions for whatever reasons cannot comply for whatever reason i.e. conflict of laws.they simply will have a pay the 30 percent witholding tax on US source income.
As I pointed out before 35 percent of Canadians don’t even have passports. Is the Canadian government going to make all these people get one just to open a bank account because the US says so when they don’t need one to board a domestic flight or a whole bunch other daily activities
@royaberg
I would also say because FATCA is technically a “tax” foreign institutions can’t avail themselves in the US of foreign compulsion doctrine of US law. Again this is why they are so upset.
@roy: Thanks for that info. There may not be an outcry by Canadian banks–They never have been particularly interested in the right of their customers. I can assure you, there will be a strong outcry from their Canadian citizen customers. Many of us already are contacting politicians, who are often in agreement with our position.
Some of us are considering contacting Human Rights and Charter lawyers.
If that doesn’t fix it, the exodus to credit unions will be fast and furious. It’s bizarre for many of us to be forced to leave our long term financial institutions when we were clearly and firmly told by American Consulate decades ago we were renouncing our US citizenship when we became Canadian decades ago.
And even if all Canadians were required to take out Canadian passports, that would accomplish nothing as far as determining which are US citizens, since in the case of dual citizens they may well have a US passport as well as a Canadian passports. Persons with US citizenship are “required” to enter and leave the US using US passports and not the passports of other countries in which they hold dual citizenship. This is not always detectable if the person was born outside of the US to a US parent. But if the passport shows as the place of birth the USA, then the red light starts flashing for the US border immigration officer to ask “are you a US citizen?” if the answer is no then they may request to see certificate that you have officially renounced US citizenship and it has been approved by the State Department. The can of worms has been opened.
@Roger
Supposedly they are looking for a US birthplace which would be indentified in a passport unless you request from Passport Canada that your birthplace not be indentified which is a perfectly legitimate request that can made of Passport Canada(Of course you cannot enter the US on Canadian Passport that does not have a place of birth in it but it is perfectly fine for many other countries)
Mr berg on pages 286 and 287 of the regulations there are exceptions for pension plans ,presumably including RSPs, and other ‘tax favored’ savings accounts. I wonder if you think RSPs, TFSAs, RDSP,s etc. will be excluded from the search and reporting requirements. I realize it may be too early to say.
“f the report is not completed, or the account holder refuses to comply, then the institution will be required to withhold 30% of any distributions to the account holder and remit that amount to the IRS.”
REALLY? THE RBC IS GOING TO TAKE 30% OF MY ACCOUNTS AND SEND TO THE IRS?
Among other things the one thing I don’t understand is the cruel and unusual penalty for people who start to comply with FATCA after learning about it. I am sure that are a lot of Brazilians GreenCarders and dual citizens who would love to do this but are afraid.
“Whether there are instructions to transfer funds to an account maintained in the US; and”
My .02 here. I think many many people will fall afoul of this one. Why? U.S. is a top destination for university. Lot of transfers to kids for tuition, living expenses and so on. We are in that case and do transfer money to the elder Frenchling on a regular basis to her account in Canada. The child has to eat, n’est-ce pas? Nothing unusual or sinister about that. 🙂 Thanks goodness she choose Canada and not the U.S. but I have friends here whose children are either thinking about the US or whose French university programs require a couple of semesters abroad, very often in the US.
I suppose there are ways around this but it’s not something a French or other European would think would be a problem. Banking here is usually done with automatic payments and the like (we use almost no checks). And frankly if someone has the money to support a child studying abroad I think we can safely assume they probably have accounts over the 50,000 USD limit.
@ Tim To be fair, I put up this post because it seemed to be a good summary of the rules; whether the banks implement the rules or not that is another question.
The specific advice to get accounts in compliance is something I have disagreed with over and over again. Most recently in this post.
What I wanted to show with Roy’s post is that given the thresholds, there are a lot of ways to avoid detection under FATCA, if that’s what someone wants to do.
Another way to avoid FATCA may be to move your accounts to a credit union. Personally, I moved my accounts to a Credit Union as soon as I became a Canadian (AND NOT AMERICAN!), because my TD Bank manager would not promise (after speaking to the legal department) to treat me as a Canadian only. So Blaze is correct: they are not protecting their bank customers. It is a huge case of CYA.
@Roger Conklin
I get your point, but on the other hand I think it is a very far reach. What you are really getting at is the true ‘accidental american’ born abroad with already another passport. And let’s say for example, one American parent. (I agree it is different if both parents are US, but this is less and less in my view). In this case, there has to be ‘proof’ of the parent livinig x years in the US, etc.. I don’t see how the IRS or any other gov’t agency will go to lengths to say these children are american, they will have to prove these details with no information availabe, and then tax them. A very far strech of imagination in my mind. And until the IRS does it to the ‘obvious and prominent’ public figures, I am quite sure they won’t do it for the average joe. And by this I mean, take the Monaco monarchy, or Paul McCartney’s first 4 children, all born to american mothers having the criteria to pass citizenship to the children. I am not aware of any of these, especially Prince Albert of Monaco calling himself an american while being on the throne. Ok they could have renounced, but here is a easy target for the IRS, clear parentage, big money, why don’t they just go after half the fortune of Monaco. Because it would be too difficult to prove and would require resources beyone their capabilities. So for me, until the IRS starts taxing the principality of Monaco as being american, I think any child born abroad to one citizen parent already having another nationality is off the IRS radar screen.
@Moody’s
THis is a good summary of what the banks will do to find american clients, but to me the bigger issue is if the individual bank or FFI, will become an IRS participating FFI or not. Clearly not all banks have an interest in the american market, and even fewer have an interest in becoming an IRS tax collector. So, besides a few obvious big ones like UBS and the like, I could easily see half or more Canadian banks becoming non-participating, not to mention perhaps 100% of Russian or Kenyan banks. And what this would mean for the US customers who wanted to stay out of the US/IRS/FATCA radar screen–they would move their assets to a non-participating FFI. I could easily see this happening. The problem for a lot of people just accidently living abroad, it is hard to tell who will become FACTA compliant/FFI participating among the banks in your foreign country or not. Apparently, the new regs. require the bank to ask for your waiver to tell the IRS if there are privacy rules or laws that would prohibit this, but seemingly this would not happen until after 2013 implementation, and for me that is a bit too late.
@markpinetree, every time I have been to the consulate, I see a lot of Brazilians with American Passports. I think most of them are completely oblivious to the rules. The last time I went there, I talked to 2 people, and both of them said “Ha! I would love to OWE taxes to the USA, but I don’t make enough money!!”
The other thing is that I am very curious to see how the FATCA is applied in Brazil. I wouldn’t be surprised if Brazil ignores it altogether. Brazil doesn’t get any “aid” from America (I read something recently that said that the USA was cutting Farm Aid to Brazil) AND banking laws are much stricter in Brazil than the USA already. Doing an inter-bank transfer from the USA to Brazil is almost impossible. They will ask lots of questions and possibly tax it at near 30%.
The “pre-FATCA” started in Uruguay in 2008-2009 when they started following the “HEART ACT”. I posted links in the forum where people were saying that most banks in Uruguay won’t open accounts for Americans. This never happened to Americans in Brazil. I used all of my Brazilian documents to get bank accounts here. Add to that I’m applying for citizenship here too. So I’m not too worried about, at least for now.
The funny thing is that most Brazilians already think I’m Brazilian because of my wife and son. I was talking to one guy last night that asked me “How long did you live in America?”, thinking that I was a Brazilian that had lived in America. I said “I am from there”. Apparently, I hadn’t said anything to give away my accent. Living in foreign countries is too cool! I never want to go back to America.