Canadians With U.S. Ties: Your Government Will Report You to the IRS

a hand holding a pencil with receipts and a calculator
The CRA will report your bank account info to the IRS in the U.S.

For many Americans, a move across their northern border into our friendly confines has, ahem, certain advantages. And we share in their jubilation when they earn their Canadian citizenship.  

But many of our new compatriots, along with many other Canadians, are shocked when Uncle Sam still comes calling for his share of income taxes.

Indeed, the long arm of the U.S. Tax Man is much longer than that of many other countries. The U.S. is one of only two countries on Earth that assess income taxes based on residency and citizenship. Other nations do not levy income taxes against their citizens who reside and work abroad.

Court Challenge Upholds Canada’s Compliance With U.S. Law

If you plan on not filing your U.S. income taxes, or any other taxes that you may be on the hook for, do not count on the Canadian government to help you. Canada has an intergovernmental agreement with the U.S. to enforce its Foreign Account Tax Compliance Act (FATCA). And the agreement just withstood a crucial court challenge here in Canada.

Under FATCA, foreign banks (meaning Canadian and institutions based in other countries), must report account information of U.S. citizens and permanent residents (“green card holders”). While the law itself has no power in other countries, its enforcement is possible through negotiated agreements with other countries. 

That agreement, two dual Canadian-American citizens who reside here argued, violated the Charter of Rights and Freedoms. They alleged that Canadian banks’ compliance with the agreement amounted to an unreasonable search and seizure. They faulted the agreement for banks turning over the information to the U.S. Internal Revenue Service without Canadian judicial oversight, which violates every Canadian’s “right to a reasonable expectation of privacy.”

In rejecting the lawsuit, Federal Court Justice Anne Mactavish said that affected persons only have “a limited expectation of privacy” regarding their account data.

The plaintiffs also argued that the agreement violates the fundamental right to equal treatment under the law, because it could allow discrimination based on national origin. Mactavish also rejected that argument.

What Should You Do?

The judge called the agreement minimally intrusive, noting that only about 10 percent of ex-pats required to pay U.S. income taxes end up owing anything. Agreements between the countries also allow many Canadians who owe U.S. taxes to deduct their taxes paid here in Canada from their U.S. returns.

But the Canada Revenue Agency has turned over information on more than 1.6 million Canadian bank records on hundreds of thousands of accounts. The CRA also does not notify account holders when they share this information with U.S. authorities.

And Conservative MP Pat Kelly says that number is likely to increase as the U.S. attempts to bring home more tax revenue from overseas due to a large tax reform bill passed there in 2017. The CBC notes that law “has hit thousands of Canadian residents with U.S. or dual citizenship and a company incorporated in Canada.”

The simple fact is that many people may be subject to U.S. taxation, even if they are not aware. For instance, if you were born in Canada to American parents, you are likely a dual citizen. And as Mactavish noted in her opinion, all of your income, “from all sources,” is subject to U.S. tax law.

The only surefire way to get out from under the IRS’ thumb is to renounce your U.S. citizenship. Numerous news reports over the last decade have reported a sharp increase in the number of people choosing that option because of FATCA. In the latest quarter, more than 1,000 people went through with a renunciation. If you feel like that may be your best option, you should discuss the matter with an experienced lawyer, so you are aware of any possible ramifications.

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