This article is written by Nicole Ewing, Director, Tax & Estate Planning, TD Wealth

Whether it’s a Power of Attorney (POA) for Property document, a joint account, or a bare trust relationship, if a U.S. person’s involved, things can get complicated quickly. Canadians without U.S. ties can find themselves and their assets subject to the scrutiny of U.S. authorities simply by engaging in common estate planning activities.

One such issue arises with respect to FBAR reporting[1], the obligation to file a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114 created under the Bank Secrecy Act.

This legislation mandates that U.S. persons (defined[2] in the legislation to include a citizen, resident, entity) with a “financial interest, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exist”[3] if the combined value of the accounts exceeds $10,000 at any time in the calendar year. The U.S. person is required to file the report and keep detailed records including the name on the account, account number, and the maximum value of the account during the year.

The legislation has broader reach then many realize – if a Canadian grants a U.S. person authority over their Canadian financial accounts, whether via a POA, by adding them as a joint account holder, or by creating certain agency-like relationships including those which may arise from bare trust strategies, the U.S. person may have an obligation to share details of the Canadian’s accounts with the U.S. government.

“Signature authority” is broadly defined[4] to include the authority of an individual (alone or with others) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the institution where the financial account is maintained. “Financial interest”[5] includes an interest in each bank, securities or other financial account in a foreign country for which the U.S. person is the owner of record or has legal title whether the account is maintained for their own benefit or for the benefit of others.

Unsettlingly, a validly executed POA document naming a U.S. person would generally meet the definition of “signature authority”, even where the individual hasn’t begun to exercise their authority under the document.[6] And, because provincial legislation does not require the named person to consent, acknowledge, or even be made aware that they’ve been named in a POA, the obligation to report may exist unbeknownst to any of the people involved.

These are the details that a professional advisor can help a client flesh out. Knowing details about proposed attorneys, executors, joint account holders, and beneficiaries is a critical step in ensuring decisions and documents are appropriate for the individual’s circumstances. Advisors can caution against naming individuals who might create unnecessary complexity and administrative costs, or they can draft documents in a way that reduces the impact of the rule (such as limiting the accounts the U.S. person has access to or making the U.S. person’s authority ineffective until they affirm their consent in writing). And they can offer alternate solutions where clients are thinking of adding names to joint accounts and creating bare trusts.

But of course, if involving the U.S. person is the best solution despite the challenges, an advisor can ensure all parties are aware of their responsibilities and have access to the expert help they’ll need.

[1] 31 CFR 1010.350

[2] 31 CFR 1010.350(b)

[3] 31 CFR 1010.350(a)

[4] 31 CFR 1010.350(f)

[5] 31 CFR 1010.350(e)

[6] In its FBAR Reference Guide, the IRS actually cites a specific example where it confirms that a U.S. person holding a POA for Canadian bank accounts would be required to report in that very situation. The Guide can be accessed here: https://www.irs.gov/pub/irs-pdf/p5569.pdf.