If the complexity of U.S. cross-border taxes doesn’t convince you to get help, the liability factor will.
“IRS holds preparers to a higher standard than taxpayers,” says cross-border tax specialist Robert Keats. “We’re subject to the same or higher penalties than what the individual would incur for underreporting or incorrectly reporting income sources.”
Read: IRS issues guidelines for tax compliance
The agency also requires anyone giving tax advice or preparing returns to have a PTIN, or Professional Tax Preparer Identification Number, and enter it on returns along with a signature. In order to obtain that number, you must be an attorney, U.S. CPA, or enrolled agent.
Since it’s onerous to get a PTIN, some advisors don’t bother.
“Some Canadians are preparing the U.S. returns and not signing them,” says Keats. “It’s a felony for the taxpayer, and an even bigger fraud on the preparer’s side.”
Problems for Green Card holders
Here’s a common conundrum for Canadian residents with U.S. ties. If your client holds a Green Card, but has lived in Canada longer than a year, the card’s no longer valid.
“I’ve seen people who’ve lived outside the U.S. for 25 years, and never handed in their cards,” says Joanne King, a U.S. tax associate at BDO. Then they remember, and hand them in (or U.S. Immigration Services confiscates them at the border).
Yet surrendering a Green Card may trigger a deemed realization of many assets, including deferred compensation plans like IRAs.
Read: Tax laws chasing funds across borders
King sees at least a dozen people per year facing this conundrum.
If client’s already handed in the card, King looks at when he actually expatriated. “Then we file an appeal and hopefully IRS agrees,” she says. If he had fewer assets on his actual expatriation date, his tax bill will be smaller.
It’s better to resolve the Green Card issue before coming to Canada.
In the case of one cardholder, “He had several million in deferred compensation plans,” she says. “So I told him he could not hand in his Green Card. We had him take out U.S. citizenship before moving here so he’s no longer subject to the deemed disposition rules. Downside is, he has to file a U.S. tax return every year.”
Read: Does your client have U.S. tax risk?
Other U.S. tax issues
- If U.S. citizens living in Canada buy American stocks, capital gains are taxed under Canadian rules — as high as 23%, while the present U.S. long-term capital gains rate is 15%.
- TFSAs aren’t recognized under U.S. tax law as tax-sheltered.
- Americans must let Social Security administrators know they live in Canada, because a treaty override removes withholding taxes. If they don’t tell the administrators, Canada doesn’t give foreign credit for those withholding taxes, because the treaty rate is 0%.
- The foreign earned income exclusion in the U.S. is $95,100; if someone earns less, she doesn’t have to pay U.S. tax on it. But to qualify for this exclusion, the taxpayer must file an additional schedule with the return. If the schedule’s filed separately or incorrectly, there’s a good chance the return won’t be assessed correctly, which could lead to penalties. You can always file an amendment, but that’s time-consuming.
- U.S. citizens must pay gift taxes. Canadians can gift tax-free.