Unlike How It Sounds – The FBAR Is Not Made Of Chocolate

Cross-border clients are often overwhelmed by the complicated, onerous reporting obligations required in both Canada and the US. Not only are there income tax reporting obligations under the tax system in Canada, but there are also US income tax, US estate tax, US gift tax and foreign financial account reporting obligations. Generally our new cross-border clients understand that they have a responsibility to file tax returns in both countries, but the requirement to file an annual FBAR is often missed.

Our team understands and integrates the complicated rules to keep our cross-border clients compliant with the regulations in both countries. One of the items that we coordinate for our clients, is providing information for FBAR reporting to their tax accounting advisors. This helps to keep our clients in compliance with yet another US reporting requirement.

What is an FBAR (Foreign Bank Account Report)?

The FBAR is the Report of Foreign Bank and Financial Accounts. It is a mandatory form that collects information on financial assets that are held outside of the United States. The information is reported annually and is filed separately from all other returns; separate from the Federal Tax Return or the Gift and Generation-Skipping Transfer Return. It is filed using FinCEN Form 114 and must be submitted electronically to the Department of the Treasury. It is not sent to the IRS.

Who needs to file the FBAR?

Annual filing of an FBAR is required when all of the following applies:

1. The filer is a “United States person” (US person). For the FBAR rules a US person includes: US citizen, Green Card holder, US resident alien, US trust, US estate, US Corporation.
2. The US person has a financial interest in, or signing authority over, a financial account.
3. The financial account is in a country other than the United States.
4. The reporting threshold is met. The reporting threshold is a combined balance of greater than $10,000 USD. The threshold is an aggregate amount combining the highest balance of all of financial assets located outside of the US. This is triggered even if the combined foreign accounts are greater than $10,000 USD at just one point in time during the year.

What information is included on the FBAR?

There are three reporting sections on the form:

1. Information on financial accounts held separately. The accounts that are owned solely by the filer are reported in this section of the form.
2. Information on financial accounts held jointly. In this section of the report, the information for each joint account is reported. The other person that holds the joint accounts must also file their own FBAR if they meet the filing criteria.
3. Information on financial accounts where the filer has signature or other authority but no financial interest. The information required in this section reflects accounts with some level of control over the disposition of the assets but no ownership. For example, this would include having signing authority on an employer’s bank accounts, or as power of attorney.

The information for each financial account is reported separately and includes:

1. maximum value in US dollars during the calendar year
2. type of account. For example: bank, securities, life insurance
3. account number
4. name of financial institution where the account is maintained
5. address of the financial institution

What is the deadline for filing an FBAR?

The FBAR is an annual filing that must be made by the deadline to avoid penalties. The FBAR deadline is on or before April 15^th in the following year. If the deadline is missed there is an automatic extension to October 15^th.

What happens if the form is not filed? What are the FBAR penalties?

It is outrageous that the penalties for not filing the FBAR are so punitive and severe considering that the form is simply informational. The severity of the penalties are based on a judgement call regarding the reason that the form was not filed.

When it is determined that the failure to file the form was non-willful, basically meaning that the person was unaware of the requirement to file, the fine may be $10,000 per violation. Court rulings indicate that this penalty is per account. That means that a violator is fined separately for each account they failed to report. This penalty can easily add up! For example, an American living in Canada may have a bank account held in their own name, a joint bank account with a spouse, a Canadian dollar investment account, a US dollar investment account and an RRSP. In this case there are 5 accounts that need to be reported. Therefore the penalty for failing to file in this case may be as much as $50,000 for each year the filing is missed!

When it is determined that the US person knowingly failed to file the form, the fine may be the greater of: $100,000 or 50% of the balance of the accounts that should have been reported. The extent of these punitive FBAR penalties is staggering!

Is there a way to get caught up on FBAR filing?

Many US persons have past due FBAR reporting obligations and there are two amnesty programs available to get caught up to mitigate the penalties. It is important to note that the amnesty options are generally only available if the process is initiated before the Internal Revenue Service discovers the delinquency.

The first amnesty program is called the Streamlined Compliance Procedure. This procedure is meant for cross-border folks who have failed to file their annual US income tax return as well as their FBAR reports. The process to use this amnesty program involves self-certifying that the failure to file was accidental and not willful, filing the delinquent US tax returns, paying any taxes owed on those returns and filing the delinquent FBAR forms.

The second amnesty program is called the Delinquent FBAR Submission Procedures. This set of procedures is meant for cross-border folks who are only behind on filing their FBAR and are up to date on filing their annual US tax returns. The procedure is to self-certify that the failure to file was not willful and to file all delinquent FBAR forms.

Common FBAR Reporting Mistakes to Avoid

1. Failure to FileOur team at Steele Wealth Management has found that many of our new cross-border clients are simply not aware that they have an obligation to file. Some new clients are not aware that they had US person status with the obligation to comply. An example we frequently address, is children born in Canada to a parent who is a US person, even if the child never resided in the US. Another example is children born in the US that move to Canada early in life. These children are considered US persons with an obligation to file FBAR forms if their financial assets meet the reporting threshold. The FBAR instructions specifically discuss minor children who have an obligation to report. The instructions explain that generally a child is responsible for filing their own FBAR. However if a child cannot file their own form for any reason (such as age), the child’s parent must file for the child.
2. Incorrectly Interpreting the Threshold AmountThe reporting threshold is calculated on an aggregate basis and is not determined on an account-by-account basis. FBAR reporting is required if the combination of the foreign financial accounts is greater than $10,000 USD at any time during the year. This threshold aggregate includes accounts where the filer has signature or other authority but no financial interest. Therefore a particular account with a balance under $10,000 may need to be reported on the form if the threshold is met by combining with other accounts.
3. Failure to Report Non-traditional Financial AccountsThe definition of “financial account” is quite broad and goes beyond the traditional bank chequing account. Financial account includes investment accounts, registered accounts (such as an RRSP or RRIF), mutual funds, annuities and insurance policies that have a cash value. It should be noted that for our cross-border clients, the US investments that we hold through Raymond James (USA) Ltd and Pershing are not subject to FBAR reporting as they are held in the US.
4. Incorrectly Calculating the Maximum Account ValueFor the calculation of maximum value, the regulations permit that the balance reported on periodic statements may be used. This has a caveat that the statement used must fairly reflect the maximum account balance during the year. This allows for the use of end of month statement balances for determining maximum amounts.For accounts denominated in non-US currency (for example Canadian dollars), the FBAR instructions provide that the account value should be converted to US dollars using the Treasury’s financial management service rate on December 31^st. To convert Canadian dollars to US dollars, the rates to be used are:

FBAR Exchange Rate for 2021 = 1.277
FBAR Exchange Rate for 2020 = 1.275
FBAR Exchange Rate for 2019 = 1.300

contact us for help

At Steele Wealth Management, we understand the challenges involved in managing wealth in both countries and our experience with complicated situations provides us with the expertise to help. The requirement to file annual FBAR forms is just another example of the complications that we help our clients address.

We are different because we integrate Canadian and American wealth. Steele Wealth Management is part of the Raymond James Financial family of companies. Raymond James (USA) Ltd. is a Canadian based US registered investment firm offering integrated cross-border wealth management solutions to Americans living in Canada and Canadians living in the US. Our team is licensed and regulated in both countries and is recognized in North America as a foremost cross-border wealth management team. We offer more than just a Canadian wealth management solution. We offer a consolidated wealth management solution and coordinate entire portfolios of assets to keep our clients on track to achieving their vision and financial goals.

For more information check out Cross-Border Services on our website.