Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
We get a lot of tax and FATCA (Foreign Account Tax Compliance Act) related questions and I wanted to take the opportunity to outline some of the most common questions in an effort to help anyone who may have similar questions about their taxability and/or tax compliance requirements with respect to US Citizenship.
I’m a US Citizen living in Canada, why do I have to file taxes?
Under US tax law, as a US citizen, you are required to file tax returns with the IRS and pay any taxes resulting from the filing. The good news is that although they may need to file in the US, many US citizens living in Canada will not pay any US taxes as a result of filing. The Canada-US tax treaty and other related domestic exemptions are in place to ensure double taxation of US citizens living in Canada does not occur whenever possible.
I’m moving up to Canada and I have 401k, IRA and a ROTH IRA. Do I need to liquidate these accounts before entering Canada.
I would definitely not liquidate any of your US retirement accounts because you’ll be moving to Canada. Unfortunately some Canadian brokers suggest this option because they can’t manage US retirement accounts from Canada. We work closely with Canadian investment advisors that have the ability to manage US retirement accounts in Canada. Please contact me for some suggestions.
If I file my US returns will I owe any taxes?
As mentioned above, it’s common for US citizens living in Canada not to pay any tax to the US. However there are certain cases where US citizens living in Canada may need to pay the US tax. Some of these reasons include:
- you have not paid enough Canadian tax to fully reduce your US tax to nil (via foreign tax credits)
- you earned US source income (will still receive a foreign tax credit in Canada)
- your US source income is significantly higher than your Canadian income due to foreign currency fluctuations.
- you’ve sold a property that was exempt from tax in Canada.
I’m a US citizen living in Canada and I’ve never filed US taxes, what do I do?
If you’re delinquent in filing your US tax returns and you qualify for the program your best alternative is to file your late returns under the streamlined tax filing procedures administered by the IRS. If eligible you will only be required to file 3 years of tax returns and 6 years of FBAR forms. Other less favorable options are available if you don’t qualify under the streamlined program.
Now that FATCA is set to be implemented in July of 2014, what will happen to the Streamlined amnesty program?
No one knows for sure, but it would be hard to believe that the IRS will keep this program around indefinitely. Considering this program has been around since September of 2012, they may consider it fair warning for anyone that has yet to catch up on their returns. We are not certain what they would put in it’s place, if anything at all. We’ll know much more once FATCA gets rolled out this year.
Are US Pensions taxed in Canada?
As a Canadian tax resident, you’re taxed on your worldwide income including US pension income. However, that doesn’t mean that you’ll be paying tax twice on your American pension payments.
As a US citizen living in Canada you’ll be required to report the US pension income on both your Canadian and US income tax return. Under the Canada-US income tax treaty you pay a maximum of 15% US tax on your US pension income. For example, let’s say Sally earns $10,000 of US pension income and her US tax rate is over 20%. She reports the pension income on both her Canadian and US income tax return. She will received an 1116 re-sourced foreign tax credit on her 1040 to bring the tax on the pension income down to 15% on her US return (5% 1116 credit). She will then report the income on Canadian income tax return and take an offsetting Canadian foreign tax credit for any US tax that she paid.
The result looks like this…(let’s assume a 25% tax rate in Canada)
- Canadian tax on the pension income = $2,500
- US tax on the pension income = $1,500
- Canadian tax of $2,500 less a foreign tax credit from her US taxes paid of $1,500 = net Canadian tax of $1,000
- She already paid $1,500 in US tax, therefore net overall tax on the pension income = $2,500
You can see from the example above that in most cases US citizens living in Canada simply pay Canadian rates on their US source income, although getting to that figure requires a fair amount of understanding of the treaty and foreign tax credit calculations.
If I haven’t filed my US tax returns can they stop me at the border?
At the moment it doesn’t seem like US border agents have access to (or care about) tax return history information for US citizens traveling back into the US. That doesn’t mean however that this is not going to be implemented some time soon. We have heard stories from clients where US border agents gave travelers a “hard time” for not traveling on their US passports. Agents often review Canadian passports for country of birth and question US citizens on their intentions.
Will CRA collect late taxes and penalties on behalf of the IRS?
Currently CRA doesn’t seem keen on collecting taxes and penalties on behalf of the IRS, however given the changes that are slated for 2014 it’s possible this will change. Even if this does change Canada would only be required to collect taxes owing on income pursuant to the Canada-US tax treaty and not on penalties resulting from late file tax returns and/or disclosures.
What does it cost to file a US tax returns each year as a US citizen living in Canada?
The cost to file a US tax return (or multiple years) and related disclosures will depend on the complexity of the returns and the amount of time required to prepare and gather the required documentation. The cost to prepare US tax returns for Canadians can vary from $500 to $5,000 depending on the work required.
What is an FBAR?
FBAR stands for Foreign Bank Account Report. Prior to 2014 all FBAR reporting was completed manually and submitted using form TDF 90-22.1 to the US treasury department. Starting in June of 2013 FBAR forms are required to be submitted electronically via form 114 through the BSA treasury site unless the forms are submitted via the streamlined tax filing program. FBAR forms are only required if the taxpayer controls foreign accounts with aggregate highest balances in the year that exceed $10,000.
I heard that if I make less than $90,000 I don’t need to file in the US, even as a US citizen?
You often hear this quoted online on tax forums and it can be very misleading. What people are referring to is the foreign earned income exemption available to individuals that work outside of the US. You can apply for the exemption by filing a US tax return and completing form 2555. For 2014 the 2555 exemption is $99,200. You’ll only be able to get this exemption by filing a US tax return and therefore you still need to file in the US even if your income is below the exemption amount. Also, 2555 exemptions do not cover other sources of income such as pension and investment income.
Does the US have inheritance or death taxes?
The US doesn’t necessarily have an inheritance tax, although any income you earn from an inheritance you receive will be taxable. Unlike Canada, the US taxes individuals at death based on US Estate tax rules. Generally speaking however if your net worth at death is less than the annual exemption amounts (less any required adjustments) you are not taxable on your estate at death. The estate tax exemption for 2014 is $5,340,000.
Do I have to pay gift tax on cash gifts to my family?
As a US citizen you are subject to US gift tax rules. However exemptions apply to certain gift throughout the year. For 2014 each taxpayer is allowed to gift up to $14,000 per recipient and $145,000 to their non-resident spouse. Gifts to US spouses (from a US taxpayer) are unlimited.
Of course, there are many other questions that are asked on a regular basis by US Citizens living in Canada. If you have a question that was not addressed above please leave it in the comment below and we’ll add it to the list above.
Can I open a TFSA or hold Canadian Mutual Funds?
If the IRS views the TFSA as a foreign trust, which is very likely, opening a TFSA would result in additional US tax forms that would need to be filed, namely form 3520/3520-A. In addition, Canadian mutual funds are considered Passive Foreign Investment Companies (PFIC) for US tax purpose. As such, you would be required to file for 8621 for each PFIC that you owe. The potential additional tax and cost to file these forms may outweigh the benefits of owning such investments.