Dual citizens pay taxes in both U.S., Canada

Dear Money Lady,

My wife is one of those United States residents who has lived in Canada as a permanent resident since 1968 and never filed a U.S. tax return. We were told that it wasn't necessary if you didn't earn income and weren't living in the U.S.

Also, we had no idea that our children, who are dual citizens due to their mother, were also required to file taxes every year even though they have never lived or worked in the United States.

What do we do now?

Ken W.

I feel for you Ken. This is a very difficult situation, one that I know a lot of dual Canadian and American citizens living here in Canada may also be worried about.

If you never plan to go back to the U.S. to live or work, if you have a home here in Canada, work in Canada, have investments, RSPs, TFSAs and kids in school, why are you keeping your U.S. citizenship?

I know, it’s a lot easier to travel using your U.S. passports; but keeping it so it’s easier to travel to Florida or Arizona in the winter just doesn’t make sense.

TAX IMPLICATIONS

The U.S. is one of the few countries in the world that make their citizens claim 100 per cent of their worldwide income (which is not the case in Canada).

So, if you have RSPs/RIFs and TFSAs, as a dual citizen – they are not tax exempted.

Also, if you hold title to any properties in Canada, for example, a primary residence (that as a Canadian, would be tax exempted when you sell it) you will owe capital gains tax to the IRS.

If you have a U.S./Canadian citizenship, please make sure you file taxes in both countries. If you do not have a social security number for the U.S., you will need to apply for one first and then file your tax returns. Make sure to transfer all ownership of any Canadian assets over to a non-U.S. resident (preferably your spouse). Speak to a U.S. taxation lawyer for assistance and once you have settled with the IRS, consider renouncing your citizenship if you plan to stay in Canada.

MOST DUAL CITIZENSHIPS HAVE NO ISSUE

Now, I’m not saying that all dual citizenships are bad. It’s totally fine with many other countries around the world; countries that don’t base their taxation on worldwide income.

For example, let’s say you were born in Australia, Germany, India or maybe the U.K. — you can have dual citizenship and live and work here in Canada.

You’re totally fine to keep both citizenship statuses and you’re not required to report

nd your income or file a second tax return in those countries (only the country of residency).

Filing two tax returns is a space unique to the U.S.A. Taxation in Canada is based on local and resident income.

RESIDENCY

So, what qualifies you as a resident of any country?

Well, you have to spend more than 183 days a year in most countries to be considered a resident, and this brings up a unique opportunity for those who love to travel.

There is a foreign-earned income exclusion that applies to all countries that don’t use worldwide income (so, the U.S. is not included).

Basically, if you keep moving, never spending more than 183 days a year in any one country, you never become a tax resident and are not subject to any tax reporting.

This is a great option for perpetual travellers who might split their time between Europe, Canada, Asia or even South America.

GIVING UP CITIZENSHIP

There’s a little snag with this proposition if you find this appealing, and that is your citizenship with Canada. Countries will attempt to tax based on citizenship, and especially if you’re using their health-care system. So, if you really want to be “free as a bird” then you must give up your Canadian citizenship and become a permanent resident of a country with a territorial tax system (for example: Panama). I’m using Panama as an example because they only tax based on local income and that’s what you want. You can become a permanent resident of Panama with an investment of only $20,000 and you only have to spend a few days there every year.

Because you don’t make an income in Panama, you now have no tax hit, and you’ll be free to travel the world as a nomad, earning income in other countries, as an independent contractor, tax-free.

Of course, you’ll have to get health-care coverage, but other than that, you’re set.

This idea is not for the faint of heart, but certainly something to consider if you want to travel.

Good luck and best wishes, Money Lady

UNSPLASH If you have a U.S./Canadian citizenship, make sure you file taxes in both countries, writes Christine Ibbotson.