Canadians May Be Subject to Surprise New U.S. Financial Reporting Requirements

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Canadian companies, their employees and individuals who do business in the United States may be surprised to learn that they may be required to report detailed information to the IRS about their Canadian bank and financial accounts as early as June 30, 2009. This requirement arises because the IRS has recently expanded the scope of rules that require “U.S. persons” to report information on their foreign bank accounts.

Background

Generally, any “United States person” who has a financial interest in or signature or other authority over any foreign financial account (including Canadian Registered Retirement Savings Plans (RRSP), Registered Education Savings Plans (RESP) and Tax-Free Savings Accounts (TFSA)) must file the “Report of Foreign Bank and Financial Accounts” (FBAR) if the aggregate value of the financial accounts exceeds US$10,000 at any time during the calendar year.

The principal purpose for collecting the information is to assure maintenance of reports that may be highly useful in U.S. criminal, tax or regulatory investigations or proceedings.

Although this FBAR form has been required for years, the IRS recently expanded the definition of “U.S. persons” who must report to include certain individuals who are neither citizens nor residents of the U.S. and to certain non‑U.S. corporations. The change applies for reports due for the 2008 tax year.

U.S. persons who are required to file the FBAR form include “a citizen or resident of the United States, or a person in and doing business in the United States.” The term "person" includes individuals and all forms of business entities, trusts, and estates. Exemptions are provided for foreign athletes or entertainers that occasionally visit the U.S.

Many Canadians may be caught in U.S. FBAR net

According to IRS officials, the new FBAR requirements apply to employees and self-employed non-resident aliens doing business in the U.S. Further, the IRS has expanded the scope of the FBAR provisions to include foreign corporations with a U.S. presence. The instructions to the IRS form state; “A branch of a foreign entity that is doing business in the U.S. is required to file this report even if not separately incorporated under U.S. law.”

Under recently published IRS guidance, determining whether someone is “in and doing business in the United States” requires an analysis of the facts and circumstances in each case. Generally, to be considered “in and doing business in” the U.S., a person must conduct business in the U.S. regularly and continuously.

Individuals who only sporadically conduct business in the U.S. or who go to the U.S. occasionally to meet with customers or business associates are not considered to be in and doing business in the United States. Additionally, a non-resident alien who visits the U.S. to manage personal investments and conducts no other business is not in and doing business in the United States.

The IRS provides little guidance, however, to determine when non-resident aliens (such as Canadian citizens and residents) are subject to these provisions. For example, it is not at all clear when a Canadian person travelling to the U.S. on business would be subject to these rules. Since it is likely that thousands of Canadians regularly travel to the U.S. on business, many Canadians may be faced with these new rules.

Canadians may face stiff U.S. civil and criminal penalties

The FBAR form must be filed on or before June 30 of the year following the calendar year reported. No filing extensions are granted. Thus, the filing deadline for 2008 is June 30, 2009.

Civil and criminal penalties, including, in certain circumstances, a fine of not more than US$500,000 and imprisonment of not more than five years, are provided for failure to file a report or supply information, and for filing a false or fraudulent report. Thus, it is important for Canadians to fully comply with these provisions if they are caught by the rules.

Due to the severity of the penalties, all U.S. persons as defined by the FBAR provisions should ensure they properly comply. We are hopeful that the IRS will provide more definitive guidelines and limit the seemingly broad scope for a Canadian individual or company to fall within these provisions.

Source: KPMG