U.S. FBAR And Form 8938 Penalties May Be A Bigger Problem For U.S. Residents Than Canada’s Underused Housing Tax

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Introduction

Canada’s Underused Property Tax came into force effective January 1, 2022. The return for the 2022 year is due on April 30, 2023. Generally, a tax of 1% of the value of the property will be imposed on the owners of property that are not occupied in an acceptable manner (principal residence or rented out) for at least six months of the year. The rules are drafted in a way that would appear to exclude short term rentals (think AirBNB) from meeting the test for “occupancy”. In addition, individuals who are are neither Canadian Citizens nor Permanent Resident are (1) required to file a return and (2) may (depending on whether the property meets the test for occupancy) be subject to the 1% tax. To put it simply: U.S. Citizens and Residents May Be Subject to “Canada’s Underused Property Tax”. New York Congressman Brian Higgins is been very active in drawing attention to the unfairness of “Canada’s Underused Property Tax” being applied to U.S. citizens. He has launched a public and visible campaign to pressure the Government of Canada to offer an exemption to U.S. citizens.

The basic structure of Canada’s “Underused Housing Tax”

In contrast to the Municipal (Toronto, Ottawa and Vancouver) “Vacant Home Taxes“, Canada’s Underused Property Tax is complicated. It is likely that those required to file the return will need assistance.

I am confident that people will be “trapped” and unfairly penalized by Canada’s Underused Housing law. On its face, the law does not apply to property owned by Canadian citizens and permanent residents of Canada. The law creates various categories of owners ranging from those who are “excluded” from reporting, to those are required to report but are “exempt” from the tax and to those who are required to report and are subject to the tax. (It appears that those owning properties through Canadian Controlled Private Corporations will be required to report!) This law is far more complex than its city counterparts. The best (and evolving) information sources about Canada’s tax may be found at:

Canadian Government Summary Of Canada’s Underused Housing Tax Law:
https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html

The Text Of Canada’s Underused Housing Tax Law:
https://laws-lois.justice.gc.ca/eng/acts/U-0.5/FullText.html

The Actual Tax Return – Form UHT-2900 – Due April 30
uht-2900-22e

Many U.S. Residents May Not Be Aware Of A Potential “Reporting” Penalty Coming From The U.S. Government

U.S. owners of Canadian property who have Canadian bank accounts

Although not discussed, it is likely that many U.S. residents who own residential property in Canada have Canadian bank accounts located near their properties. They even be U.S. dollar bank accounts. Although these accounts are “local” to the property owned in Canada they are “foreign” to the United States. This raises the question of whether the existence and account balances are required to be reported to the IRS. The answer is maybe. The United States has VERY extensive reporting requirements that apply when any U.S. citizen or resident has any interaction with income sources and/or financial accounts outside the United States. The problem is that these reporting requirements are not well known by the “average person on the street”. In short, I am guessing that a significant percent of U.S. citizens and residents who own property in Canada (1) do have Canadian bank accounts (2) have sufficient balances in those accounts to trigger the reporting requirements and (3) do not report these accounts to FinCEN and the IRS. The accounts may have little to do with “income” and therefore “taxation” per se. Yet the reporting requirements exist are based on the balances in the accounts and NOT on income earned and not on whether they are U.S. dollar accounts.

Canada’s Banks Are Required Under FATCA To Report Canadian Bank Accounts Held By U.S. Citizens Or Residents

Since July 1, 2014 Canada’s banks have been required to proactively identify and report (to the IRS via The Canada Revenue Agency) Canadian bank accounts held by U.S. residents and/or U.S. citizens. The circumstances are described in detail in the U.S./Canada FATCA IGA. FATCA has also created many problems for U.S. citizens living outside the United States.

The two major sources of “reporting requirements” for individual Americans

1 – Mr. FBAR – Found in S. 5314 Of U.S.C. Title 31 – Bank Secrecy Act

Although it NOT illegal for a U.S. citizen or resident to have a bank account outside the United States, the account may have to be reported. Those U.S. residents who have non-U.S. bank accounts for which the aggregate balances exceed $10,000 USD at any time in the year are required to file the FINCEN114 (formally FBAR). The penalties for failing to file are potentially very high! (See the following series posts about Mr. FBAR here). The penalties in the “Civil FBAR Penalty Context” are are:

– up to $10,000 USD if the failure to file was “non-willful”; and

– the greater of $100,000 USD or 50% of the balance in the account if the failure to file meets the standard of “wilfullness”

The imposition of FBAR (FinCEN 114) penalties is NOT automatic. General guidelines for “fixing” FBAR noncompliance are found here.

2 – Form 8938 – Found in Internal Revenue Code S. 6038D

In a nutshell: U.S. residents who have “Foreign Financial Assets” that in aggregate exceed $50,000 USD in value on December 31 of the year ($100,000 USD) for joint filers are required to file Form 8938 with their tax returns. The failure to file Form 8938 comes with a $10,000 USD penalty which may be abated by reasonable cause.

The procedure to “fix” the failure to file Form 8938 with your U.S. tax return is found here.

I highly recommend that those finding that they have not filed either (or both) of FinCEN 114 and Form 8938 think very carefully about their situation and seek competent professional help.

Summary Of FBAR and Form 8938 Penalties:

1. The filing requirements are NOT based on income received but are based ONLY on having bank accounts outside the United States; and

2. The U.S. imposed penalties may far exceed the the amount payable as Canada’s Underused Housing Tax!

U.S. residents who own property in Canada may find themselves in a pincer movement with the U.S. on one side and Canada on the other

The pincer movement, or double envelopment, is a military maneuver in which forces simultaneously attack both flanks (sides) of an enemy formation. This classic maneuver holds an important foothold throughout the history of warfare.

From Canada – Their lack of Canadian citizenship or permanent resident status is threatening them with a penalty of 1% of the value of their property when they file their return. If an individual fails to file a return, that individual is subject to a minimum penalty of $5000 CDN (which is far less than the possible U.S. penalties for failing to report their Canadian bank accounts).

From the U.S. – Their U.S. citizenship or resident status is setting them up for FBAR and Form 8938 penalties.

Conclusion: To be “FormWarned” is to be “FormArmed”!!

John Richardson – Follow me on Twitter @VacantHomeTax

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