Canada: IRS Offers Partial Tax Amnesty For Canadians With "Low Compliance Risk," Though Questions Remain

Last Updated: July 4 2012
Article by Roy Berg

On June 26, 2012 the IRS announced new procedures that will enable non-resident US taxpayers who demonstrate "low compliance risk" to bring unfiled tax returns and related tax reporting obligations current and avoid potentially ruinous penalties. The new procedures will become effective September 1, 2012 and further details will be announced in advance of that date. While this is welcome news, it is unclear who will be eligible to participate and what constitutes "low compliance risk."

The IRS also announced that the new procedures will allow taxpayers who hold Registered Retirement Savings Plans ("RRSPs"), or certain other foreign retirement plans, to seek relief for failure to make timely elections under a tax treaty to defer the income earned in such retirement plans. Such details will be discussed in a separate article.

Mechanics of the New Procedures

For those taxpayers who are "low compliance risk," the new procedures appear to be relatively straightforward and require the submittal of the following:

  1. Three years of tax returns and related information returns;
  2. Six years of IRS form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR");
  3. A statement dated and signed under penalties of perjury that sets forth the taxpayer's reasonable cause argument for previous failures to file;
  4. Payment of any federal tax and interest due thereon; and
  5. Additional information and disclosures, the details of which will be announced before the effective date of September 1, 2012.

For those who qualify, the new procedures promise expedited review, no penalties and no follow-up action by the IRS. The new procedures represent a substantial improvement for qualifying taxpayers who, until now, had few viable options to bring their US tax return and related filing obligations current.

Only those Taxpayers who are "Low Compliance Risk" are Eligible

The IRS's announcement makes clear that the new procedures will apply only to those taxpayers who are "low compliance risk." The announcement states:

"Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years..."

Therefore, before taxpayers decide to avail themselves of the new procedures, they must carefully examine their affairs for purposes of determining whether they have low compliance risk and are therefore eligible to participate.

If a taxpayer mistakenly concludes he is a "low compliance risk" and the IRS determines otherwise, the result could be a full examination or audit of greater than the three tax years submitted under the new procedures.

Further, the IRS reserves the right to impose tax, penalties and interest if it determines that the taxpayer does not constitute a "low compliance risk." Thus, it should be clear that the new procedures are not a true "amnesty" and the penalty abatement is available only if the taxpayer is a "low compliance risk," or if the taxpayer qualifies for a statutory defense to the penalties. Further, the new procedures do not provide protection from criminal prosecution.

The announcement states in part:

"Tax, interest, and penalties, if appropriate will be imposed in accordance with U.S. federal tax laws based on a review of the submission."

"Taxpayers who are in a situation where they are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution . . ."

Definition of "Low Compliance Risk"

"Low compliance risk" will be predicated on "simple returns with little or no US tax due" and there are no indicia of "high risk factors."

"Simple returns with little or no US tax due"

The announcement does not define the criteria the IRS will use to determine whether a return is "simple." Any taxpayer living abroad who has prepared tax returns (or paid to have them prepared) will attest that these returns are far from simple. Further, in the National Taxpayer Advocate 2011 Annual Report to Congress, the IRS acknowledged that the returns required by US taxpayers residing abroad are "overwhelmingly complex."1

The announcement does, however, define "little or no US tax due" as being less than $1,500 in each of the three years submitted under the new procedures. The $1,500 is a deceptively low threshold. Notwithstanding that tax rates are typically higher in Canada than they are in the US, there are a number of tax deductions and tax credits available in Canada that are not available in the US. As a result, taxes exigible in Canada in any given year may be lower than that in the US. (Please click here for our prior article on this topic.)

"High risk factors"

Even if each return submitted is "simple" and has less than $1,500 in US tax due, the taxpayer will not be "low compliance risk" if he possesses "high risk factors." Such factors will be set out in further detail when the final details of the procedure are released. Notwithstanding the foregoing, the announcement lists the following factors which the IRS considers "high risk."

  1. High income levels;
  2. High net worth;
  3. Sophisticated tax planning or avoidance;
  4. Material economic activity in the US;
  5. History of non-compliance with US tax law; or
  6. The amount and type of US source income.

Concerns About the New Procedure

Since the IRS will be issuing additional procedural and substantive guidance in advance of the September 1, 2012 effective date, it is premature to get overly concerned about ambiguities evident in the announcement until that guidance is released. However, there are a few items that US citizens residing in Canada should note.

First, sophisticated tax planning is a high-risk factor. This could be problematic for Canadian residents who have undertaken estate planning, or a number of very common tax planning strategies frequently utilized2 that the IRS may deem sophisticated and therefore high-risk.

For example, Registered Educational Savings Plans ("RESPs") and Tax Free Savings Accounts ("TFSAs") are very popular and effective tax deferral vehicles that could easily be considered a high-risk factor because they are deemed to be foreign trusts under US law.3 If that is the case, any Canadian resident who owns one of these tax deferred savings plans may be precluded from participating in the new procedures.

Second, high net worth individuals may be precluded from participating in the program under the new procedures. This is problematic as assets are typically not disclosed on the income tax return. Thus, it appears probable that taxpayers may be required to submit a personal financial statement to the IRS in order to participate under the new procedures.

For purposes of determining whether a taxpayer's net worth is too high to participate under the new procedures, valuation may be an issue. Many assets are notoriously difficult to value, including interests in the following:

  • private corporations;
  • defined benefit retirement plans;
  • stock options; and
  • mineral rights.

Third, on January 9, 2012 the basic terms of the 2011 Offshore Voluntary Disclosure Initiative ("OVDI") were extended indefinitely. (Click here to see our prior article on the 2012 announcement.) The OVDI allowed taxpayers to bring unfiled returns current, pay a reduced penalty, but avoid the risk of criminal prosecution. In the recent announcement, the IRS states that if a taxpayer chooses to participate in the new program, he will be unable to enter into the 2012 OVDI. As a result, the taxpayer must be very careful when electing to participate in the new program.


For many Canadian residents who need to get caught up on US tax and filing obligations, the new procedures should come as a relief. However the terms of the new procedures, and the determination of who may qualify make it unclear as to the actual number of Canadians who may be able to qualify. We are hopeful that the impending details are sensitive to typical Canadian tax and estate planning and indicia of such does not disqualify these individuals from the relief afforded under the procedures.


1 National Taxpayer Advocate 2011 Annual Report to Congress at 130.
2 For example, income splitting or tax deferral strategies using trusts, corporations or partnerships.
3 Treasury Regulation 301.7701-4.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Roy Berg
Events from this Firm
19 Dec 2017, Webinar, Calgary, Canada

By December 19, 2017, the world should know whether or not the US was successful in implementing landmark and historic tax reforms – the largest and most impactful such reforms since 1986. These reforms appear to touch virtually every American individual and business, and will ultimately affect many Canadian individuals and businesses directly or indirectly as well.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions