All children born in the USA and adopted by Canadians over the past number of years (of which there are several hundred) are US citizens. This, of course, brings a number of rights and responsibilities. For example, they would be subject to a military draft.
The USA is the only country in the world that requires its citizens to report on their world-wide income, file a tax return, and pay US taxes, no matter where they live and irrespective of what other citizenship they hold.
Now the USA has introduced a new and complicated law, which will affect every US adopted child in Canada. The name of the legislation is the "Foreign Account Tax Compliance Act" (FATCA).
Although the original intent of FATCA is to track down Americans who put money in tax havens off-shore, it applies to every US citizen anywhere. It applies to Canada even though it is not a tax haven.
All US citizens living in Canada must now do the following:
1. US citizens, residents and green-card holders who own financial accounts outside the US that exceed $10,000 in total at any time of the year must disclose them in the US Department of Treasury Form TD F90-22.1, Report of Foreign Bank and Financial Accounts, commonly called FBARs (this is in addition to filing an annual US Income Tax Return).
2. A "foreign financial account" means Canadian bank accounts, checking and savings accounts, investments, securities and brokerage accounts, RRSPs, RESPs, TFSAs, insurance and annuity policies with a cash surrender value, commodity futures or options account, shares in a mutual fund, etc.
3. All Canadian financial institutions will be required to advise the IRS of any account holders who are US citizens.
Needless to say, these requirements have been controversial in Canada. Margaret Wente of The Globe and Mail has written an article outlining these controversies, "I'm on the IRS hit list". It links to other Globe articles outlining the concerns of the Canadian government, Canadian banks and financial institutions, as well as those of US citizens living in Canada.
[Editor's Note: Wente quoted a friend as saying, "It turns out the IRS can fine you for every unreported bank account, mutual fund and RRSP - at a rate of $10,000 per offence per year. It can also confiscate as much as 25 per cent of the maximum amount you've held in each account. This is so absurd it can't possibly be true. But it is." The FATCA penalty
in question reads: "Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000".]
While these rules apply to all US citizens living in Canada, the purpose of this article is to focus on adopted children. Some children are not old enough to have bank accounts yet, while other children will have bank accounts in their names (and perhaps other financial instruments which may have been gifts from grandparents etc). Until the child reaches the age of majority the parent is required to file the forms on the child's behalf on all qualifying accounts back to and including 2005.
Adopting parents face difficult decisions in the years ahead. The reasons for this are complex, but families basically have three options:
A. Parents and their adopted children can comply with the US legislation. This seems like the prudent approach, as explained further below.
B. Have the child renounce his or her US citizenship. Of course this is not a decision that should be taken lightly. The catch is that you cannot renounce your US citizenship unless all your tax returns are filed, all the financial asset disclosure statements (FBARs) have been filed, and all US taxes and penalties are paid to the IRS.
C. Parents and the adopted child could simply not comply. As The Globe and Mail articles point out, many US citizens living in Canada are confused as to what to do, and some have stated that they do not intend to comply because of the exposure to high rates of taxes and penalties. This reason does not make sense for an adopted child. The chances of them having complex or large assets at this stage in their life are small. It does not make sense for adopted children to choose this route.
Whether your child lives in Canada as an American citizen, or unless and until they eventually renounce their American citizenship, they must file tax returns every year (if they have income), and if they have any qualifying financial accounts must file FBARs every year.
As a result, I recommend that all parents of children adopted from the USA become familiar with these rules and, if applicable, file the necessary documents with the IRS every year.
For the IRS page on FATCA, and articles on concerns with this law, Google "FATCA".
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