Navigating taxes for dual citizens

Dear Money Lady,

My wife is one of those USA 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 USA. 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.

The USA is one of the few countries in the world that make their citizens claim 100% 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.

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 UK – you can have dual citizenship, and live and work here in Canada. You’re totally fine to keep both citizenship status and you’re not required to report your income or file a second tax return in those countries, (only the country of residency.)

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 USA 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 travelers who might split their time between Europe, Canada, Asia or even South America. 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 healthcare 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. 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.

Christine Ibbotson is an author, finance writer and a national radio and television host. Send your questions through her website at askthemoneylady.ca