FACTA agreement

 by  U.S./Canada Tax Lawyer, admitted in both Canada and the U.S.

The following is a summary of an in-depth paper published by the Canadian Tax Foundation for its 2014 annual national conference, which you my find by clicking here.

When stripped of its soul-crushing complexity, FATCA—including the Canada-U.S. intergovernmental agreement (the IGA) and the Canadian implementing legislation found in Part XVIII of the Canadian Income Tax Act (the Act)—is designed to identify U.S. citizens, U.S. residents, and U.S. entities and encourage them to become compliant with U.S. tax and filing obligations by reporting them either directly or indirectly to the IRS. With the exception of children born of certain diplomats, all persons born in the U.S. become U.S. citizens at birth.[1]Thus, the clearest indicator of U.S. citizenship status is a place of U.S. birth.

Under FATCA, if an individual was born in the U.S. that individual is presumed to be a U.S. citizen, (and thus the account becomes reportable), unless the individual adequately rebuts this presumption. The Act and the IGA allow an individual resident in Canada the ability to rebut this presumption by providing a certificate of loss of nationality (CLN)[2] or, if the individual does not possess a CLN, a reasonable explanation for not having one despite having relinquished his U.S. citizenship. To date, no guidance has been issued by Finance, CRA, Treasury, or the IRS as to what constitutes a reasonable explanation for not having a CLN.[3]

The harm that may result to individuals who attempt to rebut the presumption of U.S. citizenship by currently obtaining a CLN is based in the dissonant concepts of loss of U.S. citizenship for nationality purposes and loss of U.S. citizenship for tax purposes. Before 2004 (in most cases) loss of U.S. citizenship for nationality purposes also terminated U.S. citizenship for tax purposes.

In 2004 U.S. law  and under current U.S. law, an individual may have lost his citizenship for nationality purposes years ago, however he loses his tax-citizenship at the later of giving notice to the Department of State or receipt of a CLN. Thus under current U.S. tax law, individuals who may have lost their U.S. citizenship for nationality purposes years, or decades, ago may find themselves subject to current income tax obligations (because the U.S. taxes its citizens on world-wide income), FATCA reporting, and the expatriation tax regime because they failed to properly terminate their citizenship.

Importantly, FATCA and the IGA use the tax definition of U.S. citizen and not the definition that is used for nationality purposes.  Specifically subparagraph 1(1)(ee) of the IGA provides that the term U.S. Person means a U.S. citizen “interpreted in accordance with the U.S. Internal Revenue Code.” Thus appreciation of the manner in which citizenship is lost for tax purposes is critical to understanding not only rebutting the presumption of U.S. citizenship in particular, but also FATCA in general.

U.S. nationality law (like Canadian nationality law) used to be replete with a multitude of statutes under which an individual would automatically lose citizenship by performing, or not performing, certain acts, regardless of the individual’s intent at the time.

However, in 1967 the U.S. Supreme Court held in Afroyim v. Rusk, 387 U.S. 253 that the Fourteenth Amendment to the U.S. Constitution precluded the automatic loss of citizenship unless the individual performed the requisite action (or inaction) voluntarily and with the specific intent of giving up U.S. citizenship. Thus many individuals who had been stripped of their U.S. citizenship found it to have been restored retroactively. In light of the fact that the U.S. taxes its citizens on their worldwide income many individuals who had their U.S. citizenship retroactively restored faced tax and filing obligations for prior years.

Under current law, termination of U.S. citizenship for nationality purposes is addressed in 8 U.S.C. section 1481(a). Under current law individuals may lose their U.S. citizenship for nationality purposes by voluntarily performing certain, provided such act is concurrent with the intent of relinquishing U.S. nationality.[4]

 Anyone who asserts loss of nationality must prove such by a preponderance of the evidence.[5] Further, any individual who commits any of the proscribed expatriating acts is presumed to have done so voluntarily, however the presumption may be rebutted by showing by a preponderance of the evidence that such acts were not done voluntarily.

For tax purposes, however, section 7701(a)(50) of the IRC provides that an individual shall not cease to be treated as a U.S. citizen for tax purposes until the factors of section 877A(g)(4) have been satisfied. Section 877A(g)(4) provides that U.S. citizenship is lost on the earliest of the following events:

The date the individual renounces U.S. nationality before a diplomatic or consular official, provided such renunciation results in the issuance of a CLN.

  1. The date on which an individual furnishes a signed statement confirming a prior expatriating act, provided such statement results in the issuance of a CLN.
  2. The date the U.S. Department of State issues a CLN.
  3. The date a court of the U.S. cancels the individual’s certificate of naturalization.

Thus, under current tax law, and therefore FATCA, the issuance of a CLN is required to terminate an individual’s U.S. citizenship for tax purposes.

Until further guidance is issued regarding what might constitute a “reasonable explanation” for not having a CLN, Canadian financial institutions will be in the unenviable position of attempting to interpret their customers’ explanations under both U.S. nationality law and tax law. Similarly, Canadian residents with a U.S. place of birth may attempt to obtain a CLN without fully understanding the tax and compliance consequences of doing so.

[1] U.S. CONST. amend XIV, § 1 (“All personyB born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States.”). See also 8 U.S.C. section 1401(a). Only children born of foreign diplomats with full diplomatic immunity are exempt from this rule. See INS Interpretation 301.1(a)(4)(i).

[2] “Certificate of Loss of Nationality of the United States” is found on U.S. Department of State Form DS-4083.

[3] An in-depth analysis of these issues, including historical developments, recommendations, and a working template for determining “reasonable explanation” is contained in the paper entitled FATCA in Canada: The ‘Cure’ for a U.S. Place of Birth available at https://www.ctf.ca/CTFWEB/EN/Sign_In.aspx?returnurl=/CTFWEB/EN/Secured_Content/2014/Annual_Conference/2014_Annual_Conference_Papers.aspx&IgnoreProfileRedirect=true.

[4] 8 U.S.C. section 1481(a). Very generally, and subject to jurisprudential and administrative interpretation,  the acts are: obtaining naturalization in a foreign state; taking an oath to a foreign state; serving in the armed forces of a foreign state; accepting employment of a foreign state; formally renouncing nationality before a diplomatic or consular official; and conviction of treason.

[5] 8 U.S.C. section 1481(b).

US FBAR Proposed Changes

As of March 1st, 2016 the U.S. Treasury’s Financial Crimes Enforcement Network has issued a notice of proposed rulemaking order. The proposed rule will rearrange long-standing system of reporting foreign bank and financial accounts using form FinCen 114 or FBAR.

FBAR applies to all U.S. taxpayers with foreign financial accounts that have an aggregate value $10,000 or more at any point during the year. If you own or control foreign bank or financial accounts with a combined value over $10,000, then you will likely file an FBAR. The reporting requirement covers many different types of foreign bank and financial accounts that are held outside of the United States, including everyday checking, savings, foreign retirement, investment and many others. A $10,000 per violation penalty can apply if you do not file an FBAR stating your foreign accounts even if this is done unintentionally. Harsher penalties may be enforced if the failure to report is willful.

Currently the FBAR requirements apply to persons, including company employees, officers, and financial professionals even though they do not have a financial interest in the account but merely possess signature authority. The signature authority that arises is typically a result of the employee-employer agency relationship.

Another current requirement limits the reporting obligations of an individual who holds 25 or more foreign bank or financial accounts. The obligation is deemed to have been met so long as the holder retains detailed account records for five years.

There are two changes proposed which affect the aforementioned reporting obligations. The first proposed change removes the reporting requirement for employees, trustees, or officers in an organization that have been afforded signature authority but do not have a bona fide financial interest in the account. The second proposed change waives the limitation of the requirement for account reporting once the 25-account ceiling is reached.

The proposed change for holders with 25 or more accounts are less impactful in light of the standing Foreign Account Tax Compliance Act (FATCA). Since FATCA’s reporting obligations were first introduced in 2011, holders of these accounts have already been subjected to reporting of all accounts held personally or jointly irrespective of the number.

Regardless, if the proposed rule will affect you or not, particularly in light of the underlying FATCA requirements, March 1st’s notice serves as an invitation for anyone to comment on the proposals. The U.S. government will keep this welcome window open until April 25th, just a little over a month from now. As always in tax, staying informed serves as a shield against possible tax penalties and poor guidance.


Outstanding or incomplete returns haunt some of us, and the IRS knows it. For those of you living abroad according to a completely different calendar, you have a better excuse than your peers living on American soil. But even so, chances are you can never quite forget that perhaps you haven’t filed a return in years or reported that foreign bank account. If this is you, do not despair — there is salvation that will mute your guilty conscience and save you the hefty penalties you’re dreading: Your saviour is called the Streamlined Filing Compliance Procedures.

The Streamlined Procedures is a special program designed for delinquents like you who have yet to file years worth of returns. The program is an amnesty-style program that tax delinquents have to voluntarily enter into.  And here’s why people do it voluntarily; if you reside outside of the U.S., there are no late penalties. I repeat, there are NO late penalties.

To begin clearing your slate with the IRS through the Streamlined Procedures you must file delinquent income tax returns for the last 3 years (2012, 2013, 2014) and FBAR forms (aka FinCen form 114) for the last 6 years (2009 – 2014), if filed before June 15 and June 30, 2016, respectively (or past the said due dates if tax year 2015 is filed or extended timely).

What are the penalties you’d be facing if it wasn’t for the Streamlined Procedures? Well, let’s count it up: A missed form or an account can mean a civil penalty of $10,000 or more per account or form, including a criminal penalty. Which forms are commonly required for expats?

  • Form FinCen 114 – Foreign bank and financial accounts (aka FBARs)
  • Form 8938 – Form declaring offshore foreign financial accounts and assets (aka FATCA)
  • Form 8621 – Report by a shareholder of a Passive Foreign Investment Company (this would be for certain mutual funds held outside of pensions and RRSPs/RRIFs)
  • Form 3520 – Annual return for transactions with foreign trusts (RESPs and certain TFSAs)

(Note: If you reside within the U.S. but hold accounts outside the U.S. then there is a 5% penalty, based on the highest aggregate account balance measured over up to six years given you did not intentionally withheld such information from your originally filed returns.)

Now, if you don’t qualify to settle the score with the IRS through the Streamlined Procedures and they or one of their foreign partners have not tracked you down yet, the IRS can avail you to come forward through the ironically named Offshore Voluntary Disclosure Program. The OVDP requires more onerous paperwork and a penalty to the tune upto 50% of the aggregated highest balances in your overseas bank and financial accounts in addition to several other civil penalties.  This “awesome” deal is in exchange for a waiver from a criminal prosecution.

Though the OVDP is less of a break than the Streamlined Procedures, both processes allow for you to square off unpaid taxes without having to pay the full penalties you owe. This is a system the US government says it will keep in place for the time being. However hints are being dropped that the system will not last forever. Officials said in December that after a certain point the government will stop accepting expats claim of ignorance and begin assuming any tax delinquency as a willful evasion and presumably cease the Streamlined Procedures and the OVDP. Of course, they say they’ll give us all ample warning before this happens but as with most things it’s always prudent to act sooner rather than later.