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10 Things Americans in Canada Should Know!

U.S. Citizens living in Canada are subject to complex tax rules and reporting requirements

Effective February 12, 2021, the Internal Revenue Service (IRS) has begun receiving 2020 tax returns in the U.S.

In 2020, Americans have moved to Canada in record numbers. Whether you have recently moved to Canada or have been living here for a while, there are a couple of things to know when it comes to your tax obligations.

Disclaimer: This post is for general information purposes and should not be considered advice of any kind. Due to the complicated nature of the U.S.-Canada Cross border tax issues, you are recommended to seek formal advice to determine your reporting obligations. 

U.S. Citizens residing in Canada need to file U.S. tax returns too

This is perhaps one of the major differences between the U.S. and Canadian income tax systems.

The United States taxes its citizens and permanent residents on their worldwide income regardless of wherever they live in the world. Canada, on the other hand, only taxes its “tax residents’ on their worldwide income. Therefore, an American residing in Canada must file a U.S. income tax return and report worldwide income whereas a Canadian residing in the U.S. may not have to file a Canadian income tax return unless there is Canadian-sourced income.

The due date for the U.S. Income tax return is April 15. You can file an extension up to October 15 by filing form 4868. You must pay taxes by April 15.

Higher tax rates in Canada mean no or minimum tax owing to IRS

The Canadian tax rates are significantly higher than that of the U.S. ones. Taxes paid in Canada can be claimed as foreign tax credits on U.S. Income tax returns. This often results in no tax owing to the IRS at end of the year.

Foreign tax credit Vs. Foreign earned income exclusion

The Americans living in Canada generally pay higher taxes to CRA, therefore, at the end of the year, usually no taxes are owed to IRS. It is always better to claim the foreign tax credit (FTC) as opposed to foreign earned income exclusion (FEIE).

FEIE is a better option for Americans living in countries with tax rates lower than that of the U.S.

Strict reporting requirements for foreign assets

There are strict reporting requirements related to foreign assets.

  1. Form 8938, Statement of specified foreign financial assets.
  2. FinCen 114, Report of foreign bank and financial accounts

Both of these forms have certain thresholds and carry steep penalties if applicable and not filed.

Canadian TFSAs and RESPs are treated as Trust

Tax-Free Savings Accounts (TFSA) and Registered Education Saving Plans (RESP) are tax-sheltered registered saving plans in Canada.

The income earned within these plans is deferred in Canada. However, these accounts are treated as a trust for U.S. income tax purposes resulting in the filing of additional forms 3520 and 3520-A. The additional cost of tax preparation might not justify the maintenance of these plans.

U.S. Citizens living in Canada might be eligible for Stimulus Payments

If you meet the income threshold requirement, you might be eligible to receive stimulus payments. You must file your tax returns in order to receive stimulus checks.

Americans as the owners of Canadian Corporations

As an American, if you are an owner of a Canadian corporation(s) you must familiarize yourself with complex rules related to Controlled Foreign Corporations and Passive Foreign Investment Companies. Even if your corporation did not issue any dividends to you, you might still owe taxes.

The changes were made in 2017 to how U.S. citizens and residents are taxed on their Canadian corporations. The Global Intangible Low-Taxed Income (GILTI) may apply to U.S. shareholders if they own directly, indirectly, or even constructively at least 10% of the voting stock of a Controlled Foreign Corporation (CFC). CFC is generally a foreign corporation (Canadian) having more than 50% stock owned by U.S. shareholders.

There are many tax planning tools available such as paying bonuses and dividends, filing 962 elections, converting a CFC to an unlimited liability company, or adjusting the ownership of U.S. shareholders. Form 5471 has become quite complex lately so you must ensure that a completed form is filed to avoid hefty penalties. 

Read more about GILTI here.

Streamlined filing compliance procedures

If you have been living in Canada for a while and didn’t file your U.S. taxes, you can catch up by taking advantage of Streamlined filing compliance procedures. The key is that IRS has not contacted you before you file.

You are recommended to consult a U.S.-Canada cross-border tax accountant if you intend to do so.

Tax Trap for U.S. Green Cardholders living in Canada

As mentioned above the U.S. taxes the worldwide income of its citizens and permanent residents. The U.S.-Canada tax treaty provides tie-breaker rules for tax residency issues and provides relief from double taxation. There is a potential pitfall for U.S. green cardholders. Although a U.S. Greencard holder does have the option to file U.S. income tax returns as nonresident aliens (NR). However, filing an NR return may result in compromising the permanent residency status in the U.S.

Capital gains are generally sourced to the country of residency. So a Greencard holder ends up sourcing the same capital gains to both U.S. and the Canada. Unfortunately, the Savings clause in Article XXIX of the treaty does not provide relief from double taxation to the GreenCard holders as it does to U.S. Citizens.

Always Consult a cross-border tax accountant

If you have recently moved to Canada, your local CPA in the U.S. might not specialize in cross-border tax issues. The same is applicable to tax accountants in Canada. It’s always best to consult an accountant dealing with both Canadian and U.S. income tax matters.

Maroof HS CPA Professional Corporation offers both individual and corporate cross-border income tax services. Get in touch with us today!

Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from North Dakota in the United States. He lives in Toronto.

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Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from North Dakota in the United States. He lives in Toronto.

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2 thoughts on “10 Things Americans in Canada Should Know!”

  1. Good information. I think you article was written 2 years back.
    As per new rules TFSA is not a trust under US tax law and so no Form 3520 or Form 3520-A is required. (unless it is set up as trust in Canada).

    1. Maroof Hussain Sabri

      Hi David, this post requires updates related to Rev Proc 2020-17. This years long debate on 3520 + 3520-A filing requirements for TFSA does not seem to be still settled though. If you are referring to Rev proc 2020-17, RESP does not need 3520/3520-A. The IRS yet have to provide a clarity on TFSAs. And yes, you are correct, if it is not set up as a trust, those forms are not needed, many would still love to debate this though.

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