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Trust reporting relief for American expats in Canada

Thursday, 19 March, 2020

American nationals living in Canada are to be exempted from US trust reporting requirements regarding foreign retirement trusts or non-retirement savings trusts, following the announcement of a new US Internal Revenue Service (IRS) procedure.

According to Canadian tax law firm Moodys Gartner, many common Canadian investment plans are classified as foreign trusts for US purposes, and require annual disclosure on Forms 3520 and 3520-A under s.6048 of the US tax code. These forms also come with high late-filing and non-filing penalties, and many otherwise compliant taxpayers have been hit with penalties in excess of USD10,000 because of inadvertent late filings.

However, the US Treasury Department and the IRS now intend to issue regulations removing the obligation for individuals to report their transactions with, or ownership of, these tax-favoured foreign trusts. As of 16 March 2020 they are inviting comments about these and other similar types of foreign trusts that should be considered for an exemption.

The effect of the new Revenue Procedure 2020-17 will be to give some administrative relief to US persons living in Canada who have invested in these instruments. Moreover, it will also provide a process for US taxpayers to request a refund of penalties previously assessed or paid for a historical failure to comply with these reporting requirements.

The procedure will apply to tax-favoured foreign retirement trusts and non-retirement savings trusts, which are common savings and investment plans in Canada. They include, in particular, Registered Education Savings Plans and Registered Disability Savings Plans, though not Canadian Tax Free Savings Accounts.

US persons who are compliant with all US income tax filing obligations are eligible for the new relief, provided they have reported the relevant contributions, earnings and distributions on their personal US income tax return. Former US citizens and residents who have renounced their US citizenship or surrendered their green card are not excluded.

'This relief is welcome', commented Moodys. 'We commend the US Treasury Department and the IRS for listening to the concerns of millions of US expats, including Canadians, living abroad.'

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