A primer: Americans residing in Canada must file U.S. income tax returns
Americans who reside in Canada must file United States income tax returns and bank account disclosure forms annually.
Canada’s tax filing requirements are based on residency. However, U.S. tax filing requirements are based on citizenship. American tax laws require U.S. citizens to file U.S. tax returns no matter where they reside. Therefore, a dual citizen residing in Canada must file a U.S. income tax return as well as a Canadian income tax return each year.
Fortunately, the CanadaU.S. tax treaty prevents double taxation. When tax paid on the Canadian income tax return is claimed as a foreign tax credit, it usually more than offsets tax owing on the U.S. tax return. That’s because Canadian income tax rates are generally higher than the U.S. tax rates for the same income.
Keep in mind that a U.S. person cannot deduct Canadian Registered Retirement Savings Plan (RRSP) contributions on the U.S. tax return. As well, investment income earned on a Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP) must be included on the U.S. tax return.
Even if the U.S. tax return is non-taxable because of the foreign tax credits, the U.S. tax return must still be filed each year.
Who is a U.S. person? If you were born in the United States, you are a U.S. person. If you were born in Canada and both your parents were U.S. citizens, you may be a U.S. person.
Even if you were born in Canada and only one parent was a U.S. citizen, you could still be a U.S. person depending on how long that parent had resided in the U.S.
Besides filing a U.S. income tax return annually, the U.S. government also requires each U.S. person to submit a ‘Report of Foreign Bank and Financial Accounts’ (FBAR) annually to disclose any bank account with a value exceeding US$10,000. ‘Bank account’ includes an RRSP, TFSA and mutual fund, for example.
As a way to track down U.S. persons abroad, the U.S. introduced the Foreign Account Tax Compliance Act (FATCA), which Canada implemented starting in 2015. Now Canadian banks must ask customers if they are U.S. persons and share information about U.S. persons with the Canada Revenue Agency (CRA).
Because of an intergovernmental information-sharing agreement, the CRA has shared information on half a million Canadian banking records with the IRS over the past two years.
As a result, dual Canadian-U.S. citizens are being sued by the U.S. Justice Department for civil penalties, late filing penalties and interest when they fail to file FBAR reports to the U.S. Treasury’s Financial Crimes Enforcement Network.
Any dual citizen who grudgingly decides to comply with all the IRS rules must be prepared to pay accounting fees that climb into the tens of thousands of dollars. To help reduce your annual accounting fees, you can simplify your investment holdings.
U.S. persons should avoid holding TFSAs and RESPs. Because the reporting of a Passive Foreign Investment Company (PFIC) in a non-registered account is insanely complex, U.S. persons should avoid holding PFICs such as Canadian mutual funds, ETFs and REITs.
Consult with a cross-border tax expert. Discuss filing overdue reporting forms. Learn about the IRS offers of amnesty. If you find the accounting fees and penalties too daunting, get an estimate of the cost of renouncing your U.S. citizenship or green card status.
Faced with stricter tax enforcement, 5,411 of the estimated nine million Americans living abroad chose to give up their U.S. citizenship in 2016.
Terry McBride, a member of Advocis, works with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James Ltd. Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend that clients seek independent advice from a professional adviser on tax-related matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.
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