You may have no tax obligations in the U.S., but you still may be required to disclose certain non-U.S. financial accounts to the American tax agency. Here is how the reporting regulations may affect you.

This May Come As a Surprise

You may have thought that unless you were a resident of the United States you had no obligation to tell the Internal Revenue Service (IRS) about any non-U.S. foreign bank or other financial accounts over which you have signature or other authority.

That may have been true once, but now a Report of Foreign Bank and Financial Accounts (FBAR) form must be filed by certain non-resident aliens and foreign entities and the report must include all types of accounts, including your retirement and other savings. What's more, unlike tax returns, the information in these reports doesn't necessarily remain private. 

If you fall into the first category and own or control offshore accounts with a balance of more than $10,000 at any time during a calendar year, you have until June 30 of the following year to file the form with the U.S. Treasury Department. The form doesn't impose any tax obligation, but the deadline cannot be extended. If you don't have all the required information you still must file the FBAR and amend the report when you have the missing data.

The primary purpose of the report is to collect information to help the IRS uncover illegal tax havens. Failing to file an FBAR can result in severe penalties.

One of the difficulties with the regulations is that they are unclear about who actually must disclose financial account information when they don't reside in the U.S.

The regulations require the filing of an FBAR by a "U.S. person," which includes U.S. citizens and residents, domestic partnerships, corporations, estates or trusts with interests in or signature or other authority over foreign accounts, and persons holding more than 50 per cent of the value or voting shares of a corporation with foreign accounts and persons with more than a 50 percent beneficial interest in a trust.

More critically to Canadians, however, the term also includes non-resident individuals and foreign partnerships, corporations and other entities in and doing business in the U.S. There is little guidance as to the scope of the phrase in and doing business. Generally it appears to depend on your circumstances and you would have to be doing business on a regular and continuing basis. But it is unclear whether you must be physically present or if the term includes persons engaged in trade or business by virtue of equity holdings in such entities as partnerships or Limited Liability Corporations.

The regulations do, however, cover branches of foreign entities even if the affiliates aren't separately incorporated under U.S. law, as well as non-residents working in the U.S. as employees or independent contractors.

On the other hand, IRS guidelines indicate that you don't have to file the report if you:

• Conduct business in the U.S. only sporadically, or
• Travel to meet customers or business associates, or to manage personal investments, such as rental properties, and conduct no other business.

Exemptions are also available for artists, athletes and entertainers who occasionally travel to the U.S. to participate in exhibits, sporting events or performances.

Signature Authority and the Accounts that Must Be Reported

Having signature or other authority over an offshore account means that you control the disposition of assets in the account either by your signature (alone or with others) or by some form of direct communication. This includes individuals with powers of attorney or custodial signatory rights even though they don't earn any of the taxable foreign income from the accounts.

The types of financial accounts covered by FBAR include mutual funds as well as debit-card and prepaid-credit accounts. In addition, the rules cover bank accounts and brokerage accounts containing securities, securities derivatives and other financial instruments. These would include hedge funds and variable universal life insurance policies, among others.

As well, the regulations encompass Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESP) and Tax-Free Savings Accounts (TFSA). So, under certain conditions, Canadians who don't reside in the U.S. may still have to disclose detailed information about their financial accounts in Canada.

On the other hand, individual bonds, notes, or stock certificates are not considered financial accounts, nor is an unsecured loan to a foreign trade or business that is not a financial institution.

A Privacy Consideration: Even if you don't have a U.S. tax obligation, the U.S. Treasury apparently can widely share the information it receives on the FBAR because it is not a tax return nor does it involve tax return information. The FBAR instructions specifically state that the data collected may be provided to any part of the Treasury Department, any other U.S. agency or department and "appropriate state, local and foreign law enforcement and regulatory personnel in the performance of their official duties."

The regulations are quite complex and at times vague. It is in your best interests to seek professional advice.