The one million Americans who live in Canada may face additional tax and reporting considerations regardless of where they call home, or how little time they spend in the U.S.
“Many U.S. citizens living north of the border may not even be aware that, from a tax standpoint, they may need to file income tax returns in both countries,” says Linda Leung, senior manager, U.S. Tax Planning Wealth Planning Group, BMO Nesbitt Burns.
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These clients may have to complete annual reporting forms in both Canada and the U.S., including:
- U.S. individual income tax return (Form 1040): Reports worldwide income on an annual basis, and includes foreign tax credits, which can reduce the overall amount of U.S. income tax payable;
- Canadian income tax return: For any American who is considered to be a Canadian resident for Canadian income tax purposes;
- Report of Foreign Bank and Financial Accounts – FBAR (Form TD F 90-22.1): For any U.S. citizen with a financial interest (or signature authority) in one or more accounts in a foreign country (non-U.S.) and the aggregate value of those accounts exceeds $10,000 USD;
- Statement of Specified Foreign Financial Assets (Form 8938): For U.S. citizens who have foreign accounts/assets with an aggregate value exceeding certain thresholds;
- Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund (Form 8621): For those with an interest in a non-U.S. passive foreign investment company (PFIC) such as some Canadian Mutual Funds;
On September 1, 2012, the IRS implemented new procedures providing relief from penalties for U.S. citizens who have lived outside of the U.S. since January 1, 2009, and have not filed U.S. income tax returns during that period. The penalty relief benefits those who were unaware of their U.S. income tax obligations and owe a minimal amount of U.S. income tax.
And if clients own certain Canadian investments, read on.
“For U.S. citizens, income earned in a Canadian tax-sheltered investment vehicle, such as a TFSA or a RESP, is taxable for U.S. income tax purposes,” says Leung. “U.S. citizens should think carefully about whether these savings vehicles are right for them.”
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She adds for funds in a RRSP or RRIF, an election is available under the Canada/U.S. income tax treaty that allows U.S. citizens to defer their U.S. Federal Income Tax, which avoids double taxation.
“It is very important to estimate your Canadian and U.S. income tax and plan accordingly in order to avoid penalties from either side of the border,” says Leung. “Consult with a tax advisor who is familiar with both Canadian and U.S. income tax rules.”