FATCA: For U.S Citizens in Canada – Form Details and Filing Thresholds
(Part II) FATCA For U.S Citizens in Canada – Form Details and Filing Thresholds
IRS Form 8938Form 8938, Statement of Specified Foreign Financial Assets was introduced for the tax years starting in 2011 and requires certain high-income U.S citizens and residents to report individual or business foreign financial assets over certain values to the IRS. These assets can include bank accounts, brokerage and custodial accounts, mutual funds, insurance instruments, investment entities, and annuity contracts, just to name a few. Not every U.S expat living in Canada is required to file Form 8938, but we advise you to review the instructions with a qualified U.S. tax advisor in order to understand and correctly fulfill your individual obligations. Note that while we are using the term “expat” in this article, we are using it to include other categories of specified individuals who are required to file Form 8938, as explained in the next section of this article (Who Needs to File Form 8938). If required, you will be filing Form 8938 along with your U.S federal income tax return, Form 1040. As such, the same filing and extension deadlines apply. You can review the applicable filing deadlines, including extension due dates here.
Who Needs to File Form 8938?
Individuals required to report foreign assets under the FATCA using Form 8938 include:
• U.S. citizens;
• U.S. residents (Green card holders or nonresident alien individuals meeting the substantial presence test);
• Nonresident alien individuals who make an election to be treated as a resident alien for purposes of filing a joint U.S. income tax return; and
• A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
Note that while we are discussing here the Form 8938 filing requirements for individual taxpayers, Form 8938 is also required to be filed by certain specified domestic entities. We will cover the relevant filing requirements in our other blog for business taxpayers.
If you are not required to file your U.S. income tax return, Form 1040, you are not required to file Form 8938, even if you meet one of the below thresholds!
Form 8938 must be filed by U.S. expats living in Canada if the following thresholds are exceeded (note that Form 8938 is also required to be filed by specified individuals who live in the United States; different threshold amounts apply):
Single or Married, Filing Separate Income Tax Returns
The total value of your foreign financial assets is more than US $200,000 on the last day of the tax year, or more than US $300,000 at any time during the tax year.
Married Taxpayers Filing a Joint Income Tax Return
• The total value of your foreign financial assets is more than US $400,000 on the last day of the tax year, or more than US $600,000 at any point during the tax year.
• If only one spouse resides abroad, the thresholds still apply.
Presence abroad test must be met by specified individuals to qualify for the filing threshold amounts available to taxpayer living outside the United States (reporting thresholds for taxpayers residing in the United States are much lower).
FATCA and FBAR – Do I Need to File Both?
If you are a U.S. expat living in Canada, meet the “specified individual” definition for Form 8938 fling purposes, you still may be required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), provided that you meet the respective disclosure requirements (last visited August 8, 2017).
The IRS states that Form 8938 does not relieve filers of FBAR filing requirements, but certain foreign financial accounts are reported on both Form 8938 and FBAR. For example, specified foreign financial assets held outside of an account with a financial institution are reported on Form 8938, but are not reported on FBAR.
There are different rules, definitions and reporting requirements between the two forms, and due to this, certain foreign financial accounts may be reported on one, but not both forms.
Some other differences include:
• You file Form 8938 along with your 1040 with the IRS. The FBAR is submitted to the U.S. Department of Treasury.
• Disclosure thresholds for Form 8938 are higher than the applicable FBAR thresholds.
• Form 8938 requires you to report a broader range of assets than FBAR and it does not require information about private equity or hedge funds.
• Higher penalties for non-compliance, including potential criminal charges, apply for FBAR violations.
The IRS also provides a comparison chart comparing filing requirements for Form 8938 and FBAR. You can review the comparison here (last visited August 8, 2017).
I’m Already Paying Taxes in Canada, Do I Need to File Form 8938?
Filing of Form 8938 is not dependent on whether a specified individual, such as a U.S. expat, pays taxes in Canada or other foreign country. Filing of Form 8938 is a disclosure obligation, rather than additional tax liability determination. However, the information reported on Form 8938 may be used by the IRS to identify certain transactions that may not have been reported by the specified individual.
Form 8938 – Penalties For Non- Compliance
If a taxpayer is required to file Form 8938, but does not comply with this filing requirement, she/he can be penalized up to US $10,000 per violation. Note that the penalty applies for no filing or late filing, as well as for filing an incomplete or incorrect Form 8938. There is an additional penalty (up to a maximum of US $50,000) if the taxpayer failed to file Form 8938 within 90 days after receiving the IRS notice (the US $10,000 penalty applies for each 30-day period of continued non-compliance). Reasonable cause defense may be available, but must be affirmatively used by the taxpayer.
In addition to the penalty for failure to file Form 8938, the IRS may impose accuracy-related penalty up to 40 percent of an understatement of tax attributable to non-disclosed assets.
Finally, fraud penalty may apply for non-compliance, as well as criminal penalties.
The statute of limitations does not start running until Form 8938 is filed. Then, the general three-year statute of limitations applies.