Immigration from the U.S. to Canada, or Canada to the U.S. is very common due to multiple reasons including personal, economic or political ones.
There is a large number of U.S. citizens and Green Card Holders in Canada, many of them are dual citizens while others are temporarily here for different reasons.
Disclaimer: This post is for general informational purposes and should not be considered advice of any kind. Due to the complex nature of the U.S.-Canada cross-border tax issues, you are recommended to seek formal advice to determine your reporting obligations.
Americans need to file U.S. Tax Returns, always!
No matter where you live in the world, as a U.S. citizen you must file a tax return always. There is no escape!
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. There is an automatic extension of 2 months available in some cases. You can file an extension up to October 15 by filing form 4868. You must pay taxes by April 15.
Be mindful that there is an overwhelming reporting requirement for Americans, missing the deadlines can sometimes bring tens of thousands of penalties!
Foreign Tax Credit or Foreign Earned Income Exclusion?
Many Americans still do their own tax returns using online available software.
If you have a simple T4 (employment income) from Canada and limited financial assets, and you know how to complete a 1040, why not?
The Americans living in Canada generally pay higher taxes to CRA. If you have employment income only, claiming foreign tax credits should not be a problem! After claiming foreign tax credits, usually no additional taxes are owed to the 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., our Canadian rates are way higher.
Caution: There are multiple baskets of Foreign tax credits, and then there are complex rules. If you have a mix of income, it might be better to build a relationship with a cross-border tax accountant.
Beware of strict Reporting Requirements of Foreign Assets
By far, the most challenging part for U.S. Citizens living in Canada is the foreign assets reporting to the U.S.
It’s not only the U.S., Canada also has a foreign asset reporting requirement, though it is not as aggressive as the American one – and of course, less punitive.
Reporting of Foreign Assets in the U.S.
An overwhelming amount of reporting where noncompliance is extremely punitive!
Some of these reporting requirements are listed below, however, that’s not all!
Note that some of the terms are casually and loosely used in this article to make it easier for the readers to understand.
FBAR, Form 114 to be filed with FinCEN:
If at any time during the tax year, the maximum balance in your financial accounts including bank accounts, individually or in aggregate exceeded US$10,000 equivalent, you must file form 114 with FinCEN before the October 15th deadline. FBAR is also needed if you have signature authority or joint ownership of other accounts.
The penalty for noncompliance is equal to 50% of the maximum account balance.
Perhaps, this is one of the simplest filings where a lot of DIY tax return preparers can handle it themselves.
Form 8938 – Part of 1040
There is an overlapped reporting where form 8938, Statement of Specified Foreign Financial Assets, is completed and is part of the U.S. federal tax return.
Unlike FBAR, there is a difference between the assets that are reported on 8938 and the ones reported on FBAR. Further, 8938 has a higher threshold for the assets’ value when it comes to filing requirements. The same threshold varies depending on whether a taxpayer is living in the U.S. or outside, and filing jointly or separately.
More details on filing thresholds are available here.
A detailed comparison between Form 8938 and FBAR is available here.
Given the thresholds, a lot of DIYers are also able to do this form themselves easily or with a little effort.
Foreign Corporations
If a U.S. citizen has an interest in foreign corporations (foreign to the U.S.) for example Canadian Corporations, there is a complex reporting involved.
We have written about some of these reporting requirements in detail in some other posts, and quick information is provided below.
- Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations
- Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation
Form 5471 is complex. There is income inclusion in the U.S. person’s tax return that can come from 5471. Not filing form 5471 on time can cause a penalty of US$10,000.
Read more about Form 5471 for Americans with Canadian Corporations and controlled foreign corporations.
PFIC is a thing!
PFIC stands for ‘Passive Foreign Investment Company’. PFIC regime is another complex set of rules that make it next to impossible for DIY tax return preparers.
There are some exceptions to the filing of Form 8621 and PFIC rules. More information about the PFICs is available here.
Foreign Partnerships
If you thought that the reporting requirements related to foreign corporations were complex, please note that interests in foreign partnerships require the filing of Form 8865.
Form 8865, ‘Return of U.S. Persons With Respect to Certain Foreign Partnership’ is also a multi-schedule complex form.
Foreign Branches and Disregarded Entities
If you do not have foreign corporations or partnerships, and you decide to operate as a sole proprietor, Form 8858 is required.
Form 8858, ‘Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)’ is relatively simple and less complex than 5471, 8621, or 8865. However, it is often easy to miss form.
Two of the most common situations where Form 8858 is needed for Americans:
- Canadian self-employment (Sole proprietorship)
- Rental income from investment properties in Canada
Post TCJA, form 8858 is needed for rental income from investment properties of the U.S. persons. It is often a common area of debate where tax preparers have different arguments when it comes to rental properties. However, when you start reading the regs that are cross-referred to other regs and sections of the code, it will start becoming clear that reporting is needed.
Form 8858 does not have a penalty for everyone. Though there is a penalty of US$10,000, however, they are limited for certain situations. Those who are not getting penalties should know that the tax returns are incomplete and statute of limitations is not running on those tax returns.
Foreign Trusts and Foreign Gifts
If you have an interest in foreign trusts or are in receipt of certain foreign gifts, you may have form 3520 and 3520-A filing requirements.
Form 3520, ‘Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts’ is filed separately from the tax return. In certain cases, where the foreign trust does not file 3520 on time, a substitute form 3520-A is required. Not filing these forms brings penalties.
If you are noncompliant, get in touch with us to determine the best course of action for you.
Foreign Assets/Properties Reporting in Canada
Like south of the border, the Canadian side also has foreign assets or properties reporting requirements!
Though not as aggressive as on the American side, Canadian reporting requirements can also become quite complex. Some of these reporting requirements are:
- T1135 – Foreign Income Verification Statement: If you have an interest in foreign properties (specified foreign property) where the total cost exceeds Can$100,000 at any time during the year, you need to file T1135. To make things easier there is a simplified reporting method available where the total cost is between Can$100,000 and $250,000.
- T1134 Information Return Relating To Controlled and Non-Controlled Foreign Affiliates – This is a Canadian version of Form 5471. This is also an annual form that must be filed within 10 months of the end of the tax year. The terminology is quite different than the one used on the American side.
- T1141 Information return in respect of contributions to non-resident trusts, arrangements or entities
- T1142 Information return in respect of distributions from and indebtedness to a non-resident trust
- T106 Information return of non-arm’s length transactions with non-residents – The threshold is high and applies to specific situations
Unlike the U.S., Canadian penalties for most of these forms are capped at Can$2,500 per form. However, a multi-year noncompliance can also rack up tens of thousands.
If you are behind these filings, consider the Voluntary Disclosure Program (VDP) and get in touch with us.
Americans as 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.
Besides complex reporting requirements as mentioned before, 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 (Warning: watch for constructive ownership rules).
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.
Hybrid Entity Mismatch – Your worst nightmare!
Leave your LLCs behind!
Americans love their Limited Liability Companies, LLCs!
Why not! They are a uniquely American creation for liability protection while offering all the flexibility to be a flow-through entity.
All good as long as you are not a tax resident of Canada. If you are planning to move to Canada or are already a Canadian tax resident, please be aware of the hybrid entity mismatch!
As much as Canadians are welcoming to Americans, your LLCs are not welcome unless you are planning to pay the tax cost for them.
- A U.S. LLC that has not checked the box with the IRS, causes double taxation if you are or become a Canadian tax resident. We have an article published a while ago on how a U.S. LLC is taxed in Canada, you must read that.
- LLCs that have checked the box are treated as a U.S. C-Corp.
- Hybrid entity mismatch occurs due to Canada classifying certain U.S. entities as Corporations. A detailed article on hybrid entity mismatch is a must read.
- U.S. LLP and LLLPs are also considered as corporations in Canada.
- S-Corp may have a slightly better tax treatment than a disregarded U.S. LLC. The only difference is that S-Corp is not treated as a corporation resident in Canada (CRIC) whereas a disregarded LLC becomes a CRIC.
- Owning U.S. personal assets in LLCs are assets outside by a corporation and may cause shareholder benefits in Canada.
If you have a U.S. flow through entity, it’s bets to speak a cross border tax professional before moving to Canada or setting them up as a Canadian tax resident.
Canadian TFSAs and RESPs are taxable in the U.S.
Not all Canadian registered accounts are tax-deferred for U.S. tax purposes.
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.
Both TFSA and RESP are not tax-deferred in the U.S.
You must report income earned inside these accounts in the U.S. Further, these accounts may also need to be reported on FBAR and 8938. If you hold non-US mutual funds or ETFs inside your TFSA, you may also be subject to PFIC rules.
Update: Rev Proc 2020-17 clarified that RESP does not require 3520 reporting. The IRS has not clarified its position on the TFSA yet. However, the tax community is of the opinion that if a TFSA is not set up as a trust, merely holding assets in a TFSA does not make it a foreign grantor trust.
U.S. Retirement Arrangements
Given the complexity of the personal and economic relationships of individual taxpayers, it is quite common for U.S. citizens to have different retirement accounts in the U.S.
- Growth within IRA and 401(k) plans is not taxable in the U.S.
- Roth IRA and 401(k) plans are not foreign retirement arrangements in Canada.
File Roth IRA Election with CRA on time
If you move to Canada with a ROTH IRA or ROTH 401(k), an election must be filed with CRA along with the tax return of that tax year (the first year you moved to Canada). If you do not file that election, the account is like any other financial account and income earned is taxed on an annual basis. If an election is filed, do not contribute to these plans, or else you will lose the shelter provided by that election.
If you did not file an election on time and did not contribute to ROTH IRA after you moved, you may be able to send late election to the CRA.
U.S. Citizens in Canada and 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.
Last day to claim 2020 recovery rebate credit is May 17, 2024, and for 2021 they have until April 15, 2025.
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. However, a U.S. Green Card 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 Green card 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 Green Card 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 applies 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!
2 thoughts on “10 Things Americans in Canada Should Know!”
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).
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.