TAXES Andréa Agnoloni
US Taxes Heads-Up
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n a previous article I discussed the issue of residency for tax purposes and the requirement to file Canadian income tax returns if an individual is considered a resident of Canada for tax purposes. Just south of the border, our neighbouring country taxes individuals based on citizenship, not on residency. That means a US citizen living in Canada and filing income tax returns in Canada is required to file US tax returns and report worldwide income even if none of the income is earned in the US. Many Canadians are also US citizens; some of them were born in the US and moved to Canada as a child with their families. They are required to comply with IRS rules. Filing in both countries does not mean the individual will have to pay double tax. The Canada-US Tax Treaty provides relief from double taxation, allowing the individual to claim a foreign tax credit on the US tax return for the amount of taxes paid in Canada. Some of the US tax rules are different than the Canadian tax rules. For example, some income that may be exempt from tax in Canada may be taxable in the US and vice versa. And of course the tax rates are
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different; therefore there may be some additional tax to pay when filing in both countries. Beside filing an annual tax return, the US citizen will be required to file documentation to the US Treasury under the Foreign Bank Account Reporting (FBAR). The FBAR form must be filed to report a direct or indirect financial interest in all foreign accounts if the aggregate amount exceeds $10,000 at any time in the year.
Failure to comply may result in civil penalty of up to $10,000 per violation. Failure to comply may result in civil penalty of up to $10,000 per violation. A willful failure to report may be subject to a civil penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Many US citizens living in Canada were not aware of those requirements. For example, a US citizen may have moved to Canada as a child with his family and never returned to the US. The person is now an adult and permanently residing in Canada. The IRS was aware of that particular situation and, to facilitate compliance with the tax requirements, introduced the “Streamlined program,” effective September 1, 2012. Under that program, the US citizen will be required to file income tax returns for The Society of Notaries Public of British Columbia
the past 3 years and to file delinquent FBAR forms for the last 6 years. To avoid penalties, taxpayers should consider participating in the Offshore Voluntary Disclosure Program. In the last few years, IRS has ramped up the offshore compliance program, forcing Canadian banks to share information with the IRS regarding US citizens.
RRSP/RRIF Although RRSP/RRIF income grows tax-free for Canadian income tax purposes, the annual income earned in an RRSP/RRIF is considered to be taxable income for US income tax purposes. To mitigate any double taxation, the Treaty provides for some relief. The Treaty provides an election that can be made to defer the US income tax on that investment income for US federal tax purposes until the funds are withdrawn. If the treaty election is made, the timing of the taxation becomes the same for both countries and foreign tax credits can be used to minimize any double taxation.
TFSA The income earned in a TFSA is tax-free for Canadian tax purposes; that income earned is taxable for US income tax purposes and may therefore not always be a recommended investment vehicle for a US citizen. The TFSA may be a beneficial savings vehicle for US citizens residing in Canada if the individual has foreign (such as Canadian) taxes payable on other non-US investment income (held Volume 26 Number 2 Summer 2017
