Americans in Canada must file U.S. tax returns
Tuesday, Jul. 5, 2011
By Terry McBride/Postmedia News
On Independence Day, Americans celebrated breaking their ties to the British Empire in 1776.
The residents in the 13 former British colonies became free of their obligation to pay tax to Great Britain.
These days Americans are instead obliged to file United States tax returns each year. Indeed, Americans everywhere must file U.S. tax returns.
Who is a U.S. person? If you were born in the United States, then you are a U.S. person.
Similarly if you have a green card, then you are also a U.S. person.
U.S. tax return
A U.S. person who resides in Canada must file both a U.S. income tax return and a Canadian income tax return each year.
But that does not mean you pay tax twice on the same income.
The Canada-U.S. tax treaty prevents double taxation. Tax that you pay on your U.S. income tax return can be claimed as a foreign tax credit to offset tax on the Canadian tax return —and vice versa.
While Canadian income tax rates are typically higher than the U.S. tax rates for the same income, there are other differences that could make a Canadian resident’s U.S. return more taxable than you might expect.
For example, you cannot deduct your Canadian Registered Retirement Savings Plan (RRSP) contribution and you must report investment income earned on your Tax-Free Savings Account (TFSA) on your U.S. tax return.
The U.S. government wants each U.S. person to submit a “Report of Foreign Bank and Financial Accounts” (FBAR) by June 30 each year if the aggregate value exceeds $10,000 US.
The FBAR is used to disclose the balance in any “bank account,” which is defined to include an RRSP, TFSA or mutual fund, for example.
Since 2003, the IRS started imposing severe penalties for failing to submit FBAR forms annually. They are calculated as a percentage of the balance of the financial accounts. The U.S. Department of the Treasury wants to catch U.S. residents hiding money and not reporting income from offshore bank accounts.
But the same FBAR rules also apply to U.S. persons living abroad who use foreign bank accounts to receive salaries and pay everyday bills.
On Feb. 8, 2011, the Internal Revenue Service (IRS) announced a voluntary disclosure program with automatic penalties of a percentage of total overseas financial accounts when U.S. persons file their overdue FBAR forms before Aug. 31, 2011. A U.S. person who needs to comply should immediately seek professional advice from a cross-border tax expert.
Authors Brian Wruk and Terry Ritchie have written a helpful book called The American in Canada.
They tell of a client who is a U.S. citizen living in Canada, who was flying to the United States to tend to a family matter. The U.S. Citizenship and Immigration Services agent asked him if he was filing U.S. tax returns.
Increased co-operation between the IRS and U.S. border officials will ensure greater compliance by U.S. persons resident in Canada.
Are there any U.S. tax filing requirements for Canadians who are not U.S. persons?
U.S. estate tax
Canadians who are neither U.S. citizens nor green card holders can also be subject to U.S. estate tax. If you’re a Canadian and the value of your worldwide estate exceeds $5 million US. there could be some U.S. Estate Tax to pay on the value of your U.S. property, such as a U.S. vacation home and U.S. stock portfolio.
Terry McBride is a member of Advocis (The Financial Advisors Association of Canada). This article provides general information and should not be considered personal investment or tax planning advice.