For many years now, the Internal Revenue Service (IRS) has been carrying out a campaign to bring American citizens living outside the United States into compliance with their income tax filing and related foreign bank account filing obligations. Unlike most countries, the U.S. taxes its citizens as well as its residents on their worldwide income.
On March 18, 2010, the IRS announced a significant reporting initiative aimed at financial institutions outside the U.S. to require such businesses to report U.S. citizens with bank accounts and other financial accounts at their institutions. This initiative, the Foreign Account Tax Compliance Act (FATCA), is operational in Canada. It requires Canadian financial institutions to report U.S. citizens with Canadian financial accounts to the Canada Revenue Agency (CRA), which in turn reports this information to the IRS.
This initiative has led many U.S. citizens living in Canada with dual Canadian citizenship to consider renouncing their U.S. citizenship, as compliance with U.S. income tax filings can be costly and time consuming. The act of renouncing U.S. citizenship is also known as expatriating.
In order to avoid being considered a covered expatriate subject to the U.S. expatriation tax rules, one of the criteria that must be met is to be compliant with one's U.S. tax filing obligations for the five years prior to the year of expatriation.
In particular, adult U.S. citizens living in Canada who left the U.S. as young children, or who have never lived in the U.S. but are U.S. citizens simply by virtue of having U.S. citizen parents, may have renounced their U.S. citizenship since March 18, 2010 or may be considering such action. Such individuals may have never filed U.S. income tax returns at any point in the past, and are seeking the most favourable way to become compliant.
Key features of new relief procedures
Effective Sept. 6, the IRS introduced new and simplified amnesty procedures (the Relief Procedures for Certain Former U.S. Citizens), which are designed for individuals who have expatriated after March 18, 2010 or who are considering doing so in the future.
If individuals meet the eligibility criteria for these procedures, they will need to file up to six years of U.S. income tax returns and related information returns. However, if the combined tax liability on those returns is no more than US$25,000, they won't be required to pay any tax, interest, or penalties with respect to those tax returns. And because this amnesty program requires the act of renouncing citizenship to have already taken place, they will have no further income tax filing obligations with the IRS as U.S. citizens.
After IRS acceptance of a submission under this program, individuals will be considered nonresident aliens of the U.S. for U.S. income tax purposes, and will only need to file a U.S. tax return if they have U.S. source income or spend significant time in the U.S. See our Tax Bulletin, U.S. Tax Issues for Canadians, for more information regarding the U.S. filing requirements that apply to U.S. noncitizens living in Canada.
Differences from existing relief procedures
Until the new procedures were announced, individuals wishing to renounce their U.S. citizenship and wanting to file original or amended income tax returns to bring themselves into compliance beforehand would typically file under the Streamlined Foreign Offshore Procedures (SFOP) offered by the IRS. The SFOP program will continue, and will be available to those individuals who don't meet the requirements of these new relief procedures.