US citizens living in Canada should be alert to their US filing requirements. US citizenship is acquired by being born in the US or being born by parents who are US citizens. Regardless of where you live, and to which country you associate yourself with, you should be aware that as a US citizen, you are subject to filing income tax in the US.
As a US citizen residing in Canada, apart from filing income tax in Canada, you should also be filing individual income tax on worldwide income as well as reporting any foreign bank and financial accounts to the IRS. The US individual income tax return is filed with form 1040. In addition to filing the 1040 form, the Report of Foreign Bank and Financial Accounts (FBAR) states that if you have financial interest in one or more accounts in a foreign country, and the aggregate value exceeds US$10,000, you should submit the bank account disclosure form. Note that the foreign tax credit mechanism generally avoids double taxation on both the Canadian and US income tax return. If you fail to file the US individual income tax return and comply with the FBAR requirements, you may be subject to significant penalties unless you can justify such failure with a reasonable cause. Since 2014, non-US financial institutions have also begun to identify US citizens who have interest in their financial accounts under the Foreign Account Tax Compliance Act (FATCA).
Under the FATCA, there are two disclosure requirements for a US citizen. First, a US citizen living abroad is required to complete form 8938 if they have specified foreign assets with a value that exceeds certain thresholds. Such specified foreign assets can include but not limited to bank accounts, RRSPs, stocks, pensions, etc. This disclosure requirement is attached to the individual income tax return and in addition to the FBAR requirement mentioned earlier.
Another issue that US citizens in Canada need to be aware of is the passive foreign investment company rules (PFIC) i.e. the PFIC rules. A US citizen who has shares in a passive foreign investment company (PFIC) needs to disclose his/her investment in the company on an annual basis. In general, a PFIC is a company that derives most of its gross income from passive income or at least half of its assets produce passive income. This would include Canadian mutual funds or ETF’s.
Fortunately, with the new procedures from IRS, if you are a US citizen who has been unaware of your US tax obligation, you may be relieved from penalties. To benefit from the new procedure, you must be a US citizen who has lived out of country since January 1, 2009, and has not filed individual US income tax. You will also be required to submit the three years past due tax returns, FBARs for the past six years, and a completed IRS statement. The Offshore Voluntary Disclosure Program, which is another option for US taxpayer to be compliant, will not be available if you decide to make a submission under this new streamlined procedure.
Tax Doctors Canada - The proven experts in US-Canada tax services
If you are a US citizen residing in Canada, it is important to understand any tax implications that may arise. Cross-border taxation can become quite complicated. At Tax Doctors Canada, we can help. The professional tax accountants at Tax Doctors Canada have extensive experience in handling Canadian and US tax matters.
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