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.
| Relief Procedures for Certain Former U.S. Citizens (announced Sept. 6, 2019) | Streamlined Foreign Offshore Procedures (SFOP) (announced July 18, 2014) |
|---|---|
| Targeted at former U.S. citizens residing outside the U.S. who have renounced their U.S. citizenship | Targeted at U.S. citizens and green card holders residing outside the U.S. |
| Must have renounced U.S. citizenship after March 18, 2010, and include Certificate of Loss of Nationality, foreign passport or birth certificate, and Form 8854 expatriation statement with submission | Eligibility not tied to U.S. or foreign citizenship status—available to both current and former U.S. citizens, as well as green card holders |
| Must not have previously filed a U.S. resident income tax return at any point during lifetime (having filed a U.S. non-resident alien tax return in error does not make one ineligible for these procedures) | May have previously filed U.S. resident tax returns, original or amended tax returns permitted |
| Net worth must be less than US$2 million at time of expatriation and at time of applying for these relief procedures | No eligibility criteria based on net worth |
| Average annual net income tax for the five years ending before the expatriation date is less than a specified amount that is adjusted for inflation (US$168,000 for 2019) | No eligibility criteria based on amount of income tax liabilities |
| Failure to file in the past must not be due to willful conduct (no explicit certification required) | Failure to file in the past not due to willful conduct, explicit certification required |
| Must file income tax returns and related information returns for the five tax years prior to the expatriation year, and the year of expatriation | Must file original or amended income tax returns and related information returns for the three most recent years for which the filing deadline has passed |
| Total taxes owing on the six income tax returns submitted must not exceed US$25,000 in aggregate | No eligibility criteria based on amount of income tax liabilities |
| No specific eligibility criteria based on days spent outside of the U.S. | Must be outside the U.S. for at least 330 full days outside of the U.S. in at least one of the three years for which income tax returns are required to be filed, and lack a U.S. abode for those years |
| If accepted, no taxes, interest, or penalties are owed | If accepted, taxes and interest must be paid, but no penalties are owed |
| No further obligation to file U.S. resident income tax returns | U.S. resident tax returns must continue to be filed in future years if expatriation has not occurred |
| Not necessary to have a Social Security Number or other U.S. identification number, can submit under Individual Taxpayer Identification Number (ITIN) if already obtained in error | Tax returns must include U.S. Social Security Number |
| Filing delinquent FinCEN Form 114s Report of Foreign Bank and Financial Accounts (FBAR) is not an eligibility criterion, but encouraged—penalties will not apply if filed concurrently with this submission | Must file original or amended FBAR filings for the six most recent years for which the deadline has passed—penalties will not apply if filed concurrently with this submission |
| IRS will send a notification when it has accepted submission | No acknowledgement of receipt of filing; IRS will only send notification if it identifies errors or omissions in the submission |
| No termination date of procedures specified; announcement will be made by IRS prior to termination | No termination date of program specified, but informal IRS commentary suggests that procedures are not intended to be in place permanently |
Due to the complete amnesty on taxes owing, the new procedures are more favourable for those individuals who qualify than the existing SFOP procedures offered by the IRS. Note that the US$25,000 aggregated income tax liability is after taking into account all available deductions and credits, including foreign tax credits or the foreign earned income exclusion. As many U.S. citizens living in Canada do not owe much U.S. tax because of these deductions or credits, the US$25,000 aggregated tax threshold may not be a difficult requirement to meet.
For more information about the U.S. filing requirements for U.S. citizens living in Canada in general, see our Tax Bulletin, Tax Consequences for U.S. Citizens and Other U.S. Persons Living in Canada.
If you have questions about your income tax filings as a current or former U.S. citizen living in Canada, contact our U.S. tax advisors at BDO Canada LLP.
The information in this publication is current as of October 1, 2019.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.