Part I – What does the $50,000 threshold for FATCA reporting mean in practice?
This post is focused ONLY on accounts held by (1) individuals who (2) are “US Persons” within the meaning of the FATCA IGA who (3) have been identified as “US Persons” and who (4) have been unable to “self-certify” that they are not “US Persons”. There are tens of thousands of US citizens in Canada and other countries that carry on normal banking activities with their “USness” undetected. Their accounts are not being forwarded to the USA.
This post is NOT intended to apply to entity accounts or any other kind of account.
The Context …
As a result of the FATCA IGA, Canadian financial institutions are required to report any accounts owned by “US Persons” to the Canada Revenue Agency. The definitions section of the IGA stipulates that the definition of “US Person” is determined by the US Internal Revenue Code. Therefore, all countries who have signed FATCA IGAs have allowed the United States to define any of their citizens or residents as “US Persons” now and in the future. (I wonder whether this is a reason why China has not signed a FATCA IGA.)
The Canada Revenue Agency (acting as a conduit) forwards those (“US Person”) accounts to the US Internal Revenue Service. The rules are complicated and include some discussion of a $50,000 USD threshold before the account is to be reported. Although that threshold had some meaning with respect to pre-existing accounts, it has been rendered less meaningful through time. It is reasonable to infer that the Canadian banks are reporting some accounts that they are not required (but permitted) to report. Nevertheless, I suspect that most of the lower value accounts ARE subject to FATCA reporting. Many of the complaints focusing on the banks reporting accounts less than $50,000 are justified. But, many of those under $50,000 accounts are required to be reported. To put it simply: When it comes to accounts with balances less than $50,000 – some are required to be reported and some not.
The $50,000 USD Question? Concerns from 2016 …
As early as 2016, Elizabeth Thompson writing for iPolitics raised this issue here. At a minimum her article highlights the confusion surrounding the reporting of accounts with a balances less than $50,000 USD. Her article includes this paragraph:
Testifying before a House of Commons committee in April, Privacy Commissioner Daniel Therrien told MPs he was concerned that information on bank accounts under $50,000 that doesn’t have to be shared with the IRS is being shared.
“There seems to be a discrepancy between the agreement between Canada and the U.S – the IGA – on the one hand and the income tax act on the other as to what happens to accounts under $50,000,” Therrien explained in an interview after the hearing. “The agreement seems to suggest that accounts under $50,000 do not have to be disclosed to the IRS where the Income Tax Act, the Canadian legislation, says under $50,000 is disclosable unless the financial institution decides that it is not.”
“So that gives a lot of discretion to financial institutions to report or not and I think that’s not desirable.”
2021 – The $50,000 USD Question Continues …
The result of an information request to the Government of Canada, which was reported at the Isaac Brock Society, suggests that:
Information request suggests: Majority of Canadian Accounts Reported under #FATCA to Tax Authorities have balance below $50,000 USD. How does this follow from the IGA and Part XVIII of the Income Tax Act of Canada? Does any USness mean automatic reporting? https://t.co/9eyQlHP04z
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 11, 2021
I suspect that the majority of accounts reported under the FATCA are below $50,000 USD. Furthermore, I suspect that (at least with respect to accounts) opened after July 1, 2014, that reporting many lower value accounts IS required under the FATCA IGA. With respect to the small number of “depository accounts” that may not meet the reporting requirement, Canada’s banks probably find it administratively easier (and a certain route to remain compliant) to report.
The $50,000 USD threshold had greater significance for accounts that existed on June 30, 2014. The threshold (for reasons I will explain) has less significance for accounts opened after July 1, 2014. This post will explain why this is.
The $50,000 USD FATCA Question Answered – Quick And Dirty Summary
Canadian residents should not believe that accounts less than $50,000 USD are not reportable under the FATCA IGAs. (Registered accounts: RRSP, TFSA, RESP, RDSP, etc. are NOT defined as accounts and by therefore by definition are not subject to reporting.) All other accounts are, whether mandatory (as per the agreement) or optional (the banks can opt to report them), subject to FATCA reporting.
Pre-existing Accounts in existence on June 30, 2014: To the extent that a $50,000 USD exemption is available, that exemption would apply to ALL individual accounts in existence on June 30, 2014. In determining whether the $50,000 threshold had been met, account balances were not considered individually. They were considered in their aggregate.
New Accounts opened after July 1, 2014: To the extent that a $50,000 USD exemption is available, that exemption would apply only to “depository accounts”. Canadian banks are REQUIRED to report all accounts that are not “depository accounts”. “Depository accounts” below the $50,000 USD threshold are not required to be reported under the FATCA IGA, but are permitted to be reported under the FATCA IGA and the Income Tax Act of Canada. Again, when it comes to determining the $50,000 USD threshold: it’s the aggregate of the account balances that matters.
(At the risk of oversimplification, a “depository account” should be thought of as a basic bank account. An example of a “custodial account” would be a basic investment/securities account.)
Beware of the account aggregation rules in determining whether the $50,000 threshold has been met!!!
First there was FATCA. Then came the CRS
The CRS (“Common Reporting Standard”) came after FATCA. Although both FATCA and the CRS are AEOI (“Automatic Exchange Of Information”) information exchange agreements, they operate very differently.
On the most basic level:
FATCA: Information flows from a country where the individual does live and is a tax resident (Canada) to a country where the individual does not live, but is deemed to be a tax resident (USA). Because of the “saving clause“, tax treaties cannot be used by US citizens to assign tax residency to one country. This means that Canadian citizen/residents who are also US citizens are treated as though they are tax residents of both Canada and the United States. Information will be transferred from Canada to the United States.
CRS: Information flows from a country where the person is not a tax resident (Canada) to a country where the person is a tax resident (for example France). But, how is it determined where a person is a tax resident? Each country is free to determine its own rules for tax residency. In cases where a person is a tax resident of two countries, tax treaties CAN be used to assign tax residency to one country. A treaty can be used to assign tax residence ONLY to Canada. Because, tax residency is assigned only to Canada, information will not be transferred from Canada to the other country.
Both FATCA and the CRS require banks to ask customers to certify their tax residency. Canada uses one form to both FATCA and the CRS. Canada’s combined FATCA/CRS Self-Certification form focuses ONLY on questions of tax residency. The CRS has no monetary threshold for reporting. This has the effect of encouraging financial institutions to ignore any monetary threshold in the FATCA IGAs.
Declaration of Tax Residence for Individuals – Part XVIII and Part XIX of the Income Tax Act