Canadians who take extended vacations in the United States may now be required to file a Report of Foreign Bank and Financial Accounts (FBAR)by June 30thor become subject to the draconian penalty scheme of the Bank Secrecy Act now being vigorously enforced by a near bankrupt United States.
The U.S. Financial Crimes Enforcement Network (FinCEN) issued in February 2011 new regulations regarding the Report of Foreign Bank and Financial Accounts.
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
Under the new regulations, the term ‘‘United States person’’ means— (1) A citizen of the United States; (2) A resident of the United States. What is new is that a resident of the United States has been expanded to include any individual who is treated as a U.S. tax resident under the Internal Revenue Code Section 7701(b) and the regulations thereunder. Previously, the U.S. Internal Revenue Manual provided this definition of “resident alien” is not applicable for FBAR purposes, and that the plain meaning of the term resident (in this context someone who is living in the U.S. and not planning to permanently leave the U.S) should be used.
The preamble to the new regulations notes that a legal permanent resident (“Green Card” holder) who elects under a tax treaty to be treated as a non-resident for tax purposes must still file the FBAR. There is no specific guidance relating to individuals who are residents under the “substantial presence” test, but presumably they would be covered by the expanded definition. Historically, the role of U.S. tax treaties has been to limit tax liability, but not to excuse reporting obligations of individuals who are residents under the Code and its Regulations.
The rules that determine who is a resident under the Code and its Regulations are extremely complex. To wit: a person who might otherwise qualify for an exception to U.S. residency because he/she has a closer connection exception to a foreign country and file a Form 8840, may nonetheless be resident under the “no lapse” or continuity of residence rules, and hence unable to rely on that exception. If there is doubt concerning whether a person could be treated as tax resident in the U.S. for FBAR filing purposes, consideration should be given to filing an FBAR on a “protective basis.”
In light of the forgoing, snowbirds should seek timely U.S. tax advice regarding their particular status, including whether it is advisable for them to file an FBAR.
Sunita Doobay and Vitaly Timokhov
TaxChambers LLP is collaborating with Andersen Global® in Canada.