U.S. citizens and green card holders living outside the U.S. remain a priority for the IRS.
As a result, they’re required to report income and file U.S. returns. They also have to file forms to the U.S. Treasury Department to verify their Canadian and non-U.S. investments, as well as their investment bank account holdings
Those who haven’t kept up with filing their U.S. taxes need to get compliant. To facilitate this, the IRS has made changes to both its offshore voluntary disclosure and streamlined tax filing programs, as of June 18th, 2014.
Read: IRS gives expats another chance to come clean
Amendments to the Streamlined Filing Compliance Program (SFCP) are a welcome change; once eligible, U.S. citizens and green card holders in Canada are able to file:
- three years of U.S. tax returns;
- six years of Foreign Bank Reporting Forms (FBARs); and
- other tax related disclosures.
But to be eligible, the taxpayer must also show her failure to file was non-willful. That’s done by filing a non-willful conduct disclosure certification. She also has to prove she has no U.S. abode by showing she was physically outside the U.S. for at least 330 days in any of the last three years (currently, that’s 2011, 2012 and 2013).
Read: Don’t fall for FATCA scams, warns IRS
Note also that as part of the recent changes, the $1,500 tax and residency test has been eliminated.
It’s difficult to plan for U.S. tax reporting after clients have established Canadian investment accounts without regard to U.S. requirements. So ask if clients are U.S. citizens or green card holders. If they weren’t aware of their obligations, enlist the help of a cross-border tax professional so you can try to ease potential compliance penalties and extra taxes.
Meeting eligibility requirements of the new program may seem easy, but completing returns and related disclosures can be complex.
Read: Client caught in cross-border trap
Bill’s an advisor who’s learned his new client, Kim, is a U.S. citizen. Kim lives in Vancouver with her Canadian-born husband and her two kids.
Kim was born in the U.S. and moved to Canada in her early 20s, when she met her husband. Kim’s a lawyer with the B.C. government, and her financial situation is as follows:
- annual employment income is $170,000;
- $1 million in non-registered savings;
- a joint investment portfolio with her husband that includes Canadian mutual funds;
- $500,000 in RRSP;
- $40,000 in RESP;
- $1.3 million house with a mortgage of $500,000 (owned jointly with husband);
- $20,000 in TFSA; and
- she’s not the beneficiary or trustee of any trusts.
Bill has other U.S.-citizen clients and understands how important it is for Kim to catch up on her U.S. returns. To learn how he helps her, turn to the next page.
To start helping Kim, Bill schedules a meeting with her and his cross-border tax advisor. The first step is to assess Kim’s eligibility under the SFCP. Since she’s been in Canada for the last three years, doesn’t have a U.S. abode and hasn’t willfully neglected to file her U.S. returns, she could be eligible.
What will Kim need to compile and file to be fully compliant? Specific requirements vary significantly from taxpayer to taxpayer, but based on her details, she’d need to file the following materials.
1. 2011, 2012 and 2013 1040 U.S. income tax returns
Her worldwide income will be reported on these returns; so too will various credits and exemptions that’ll be used to reduce her taxes. In most cases, U.S. citizens living in Canada won’t pay any U.S. taxes upon filing. However, some items not reportable for Canadian purposes are taxable under U.S. law, such as income earned in a TFSA or RESP.
Read: Foreign tax tips from Golombek
2. Some additional forms
a) Form 8891 to report her RRSP used to be required, but the IRS has just announced the elimination of this form.
b) Form 8938 to report foreign assets (similar to the FBAR form)
c) Form 2555, if required, to report exemption for foreign earned income
d) Form 1116 to report foreign tax credits
e) Possible filings of form 3520 and 3520A for her TFSA and RESP
f) Additional forms as required (possible PFIC forms for any Canadian mutual funds
held in non-registered accounts)
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3. FBARs for 2008 to 2013
The FBAR is now provided as an electronically fillable PDF form. It’s used to report Canadian and non-U.S. investment bank accounts, and related information. These forms are electronically filed with Treasury under SFCP.
Along with her non-willful certification document, she needs to file RRSP treaty election certification forms.
Once Bill, Kim and the tax advisor complete her streamlined filings and compile all required information, the tax advisor can file returns and related disclosures under SFCP. Kim will then be fully compliant.
Read: STEP 2014: Update on U.S. tax exposure
To help simplify her taxes going forward, it may be advisable for Kim to close her TFSA and sell her Canadian mutual funds (she should be sure to discuss tax implications with her advisor before doing so).
She could also consider transferring her RESP accounts to her non-U.S. husband.
Phil Hogan is a chartered accountant who practices in Victoria, B.C. He specializes in Canadian and U.S. taxation, and focuses primarily on cross-border tax matters and CRA/IRS dispute resolution. He can be reached at firstname.lastname@example.org or at 250-381-2400.