I spent five glorious months of my law school career on exchange in L.A. I loved living in California: when the “winter” came, I couldn’t believe how warm it was. I drove to class every day with my sunroof open and palm trees gracing the sky above me. I got myself a cute little apartment in West Hollywood and a California driver’s licence so I could get my car insured. I still carry the licence around with me in my wallet as a memento of that sunny time; it has my West Hollywood address on it, and I look tanned and happy. I also spend as much time as possible in L.A. each year visiting friends and reliving my glory days as a student.
Little did I know that my shallow American roots might one day be the cause of decidedly un-sunny times. The Foreign Account Tax Compliance Act, more commonly known as FATCA, a U.S. tax law passed in 2010, is now making a big splash in the news. The law requires all foreign financial institutions, including banks, to report on the account information of “U.S. persons” to the Internal Revenue Service (the “IRS”) starting in July 2014. One of the major issues with FATCA, whose primary aim is to curb tax evasion through the use of accounts held by U.S. persons at financial institutions outside the U.S., is the IRS’s definition of “U.S. person.”
Under the Internal Revenue Code, a “U.S. person” is:
- A citizen or resident of the United States,
- A partnership created or organized in the United States or under the law of the United States or of any State,
- A corporation created or organized in the United States or under the law of the United States or of any State,
- Any estate or trust other than a foreign estate or foreign trust,
- Any other person that is not a foreign person.
FATCA, then, has a broad reach that includes all U.S. citizens – even U.S. citizens who have lived in Canada since they were babies but haven’t renounced their American citizenship. The legislation also ensnares Canadian spouses of U.S. citizens who share a bank account, for example. And then there are people like me: though unlikely, it is conceivable that Canadians who have lived and worked in the U.S. might catch the attention of their bank, whose job it is to identify customers who may potentially be classified as U.S. persons.
The Canadian Bankers Association also warns that people who spend a substantial amount of time in the U.S. each year might fall into the definition of “U.S. person.” Many of our clients are snowbirds who therefore may be caught by this legislation; more information on snowbirds and the implications of spending a large number of days south of the border can be found here.
The impact of FATCA remains to be seen, but it is safe to say that the legislation raises issues about privacy and cost. The legislation is complex, and financial institutions will bear the brunt of the cost of compliance with it, but the penalty for non-compliance will be felt by financial institutions’ customers as well; the penalty for non-compliance with FATCA is a withholding tax of 30% on all U.S.-source income.
What constitutes non-compliance with FATCA? First, non-U.S. persons like me who might get flagged by their banks and are subsequently asked to show proof that they indeed are not U.S. persons may be subject to the withholding tax mentioned above if they refuse to show such proof. U.S. persons may have to provide consent to their financial institutions for the disclosure of their information; if they don’t, they may also be subject to the 30% withholding tax, have their current accounts closed or be unable to open new accounts.
Some U.S. persons do have another choice, though: they can give up their citizenship, like Tina Turner (who is just a little more closely connected to Hollywood than I am) recently did, when she relinquished her U.S. citizenship in order to become Swiss. (However, whether Turner became Swiss for tax reasons is debatable since she has actually lived in Switzerland for many years and her husband is German.)
Regardless, renouncing citizenship is a serious decision for anyone, a decision that requires careful consideration and discussion with cross-border experts who can assist American expats in the complex world of international tax and immigration law. FATCA is now just one more law for everyone to consider.
The information contained herein is for informational purposes only, and is not legal advice or a substitute for legal counsel. It is not intended to be attorney advertising or solicitation. If you have a legal question, please consult with a licensed attorney.
