Cross-Border Tax QA – FBARs, 1116, IRA Transfers and Other

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As you can imagine I receive a significant amount of cross-border tax questions each and every week. Given some of these questions are quite frequent I thought it might be helpful to post some answers to some of the most frequently asked cross-border tax questions I get.

Do I have to file an FBAR?

If you are a US Citizen, Green Card Holder or a US tax resident you may be required to file FBAR forms (aka form 114).

Assuming you are one of the three listed above you’ll need to file an FBAR if the agreggate of the highest balance in all your non-US bank and investment accounts are over $10,000 USD.

This filing threshold can be understandably confusion to many, so let me break down in more detail how to assess if you need to file an FBAR.

You’ll take inventory of the highest balance in all non-US bank, investments and other financial accounts that you have signing authority over. Add up all these balances and convert the them at the year-end USD exchange rate (depending on which country you live in). For Canadian FBAR rates please visit here. If the USD total of the calculation is above $10,000 USD then you have FBAR filing requirements.

People often mistake the correct calculation above with the following:

“you only need to file an FBAR for accounts over $10,000” or “you only need to file and FBAR if one of your accounts got over $10,000”

Both of these are incorrect. For example, you may have a $7,000 USD account and a $4,000 USD account and although neither of them are over $10,000 you’ll be required to file an FBAR because the total of these 2 accounts exceeds $10,000 USD.

Should I file my US or Canadian income tax return first?

Often clients either file their own Canadian return and have a US tax accountant in Canada file their US return. Or they have a Canadian accountant file their Canadian return and their US tax accountant file their American income tax return. Of course this can be quite inefficient.

For our clients, whenever possible, we file both the Canadian and US returns together at the same time. Often well before the April 30th Canadian deadline.

If you don’t work with an accountant that files both your returns at the same time the following should be noted (general statements, but in most cases this should apply):

  • If 100% of your income is Canadian source you can likely file your Canadian return first and then your US return subsequent to the Canadian filings. This is because you’ll first need to know how much Canadian tax you paid to get credit for this tax on your 1040 return via form 1116 (foreign tax credits)
  • If you have a mix of Canadian and US source income it will be tough to file either the Canadian or US return at different times because you’ll need to know how much taxes are paid on each return to ensure you properly calculate each respective foreign tax credit.
  • This might not always apply as taxpayers can often only have one source of Canadian employment income and use form 2555 to reduce their US tax income down to nil for the year.

Should I use the foreign earned income exclusion or 1116?

I get this question a lot. People ask me if they should use the foreign income exclusion form (form 2555) or the foreign tax credit form to reduce their income/US tax down to nil.

The answer to this question really depends on your mix of income for any particular year. If all you have is Canadian employment income it’s likely easiest to simply use form 2555 to reduce your 1040 income to nil for the year. However even in cases like that I tend to use form 1116 as I’m able to carry forward Canadian taxes as US foreign tax credits to future years. This can be quite useful in years where your Canadian tax rate falls below your US average tax rate.

If you have a mix of other income, like pensions and investment income, using form 1116 will be necessary to ensure you don’t pay double tax on that income.

Should I transfer my IRA to my RRSP?

I’ve written extensively on this topic for please click here for some articles on the subject of IRAs and RRSPs.

However, generally speaking, it’s not advisable to transfer your IRA to an RRSP, especially if the account is relatively large. For large IRAs it might take several years to actually make the transfer into an RRSP and will require extra tax work each year to make this happen properly. Not only that your Canadian return will be at a higher risk of being reviewed by CRA.

That being said, if you think that there would be an advantage to splitting income in the future with your spouse you may consider transferring some or all of your IRA to an RRSP to ensure future RRIF payments can be split with your spouse.

Do I need to file an T1135?

Similar to the FBAR discussion above Canadian tax residents with non-Canadian assets also have potential foreign disclosure filings. However, unlike the FBARs the T1135 also includes assets such as foreign real property.

As a Canadian tax resident if you have foreign property with a cost that exceeds $100,000 you’ll need to file a T1135 at the same time your Canadian tax return is due.

The only exception to filing the T1135 (other than the filing threshold above) is a first year exemption granted to those that are first time Canadian tax residents. Note however that if you were a tax resident in the past and then moved back to Canada subsequently you will not be eligible for this first year exemption. Therefore if you left Canada to move abroad and now are back in Canada make sure to file your T1135 when you return.

I hope some of those answers help clarify some of the most common and important cross-border questions taxpayers have. If you need clarification on any of the above please don’t hesitate to email me at phil@philhogan.com.

 

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