I recently attended a number of continuing education seminars. In attending these seminars, I felt it might be beneficial to highlight a few recent changes in US law that will impact US citizens that reside in Canada. I recognize that many individuals may not be US citizens. However, there are over 1 million US citizens living in Canada. That means approximately 1 in every 30 Canadians also carry US citizenship. Further, in southern Alberta the concentration of Canadians holding US citizenship is much greater. As such even if these matters do not affect you personally, these laws will likely directly affect a close family member or friend.
1. Duties of US citizens resident in Canada under US Tax Law
Contrary to the Canadian tax system which is based on residency, the US Tax system is based on one’s citizenship as well as residence. Under US tax laws, all US Citizens regardless of their place of residence, US residents or green card holders (collectively referred to as “US Persons”), have a statutory obligation to file their tax returns in the US.
US Persons must report all of their “worldwide income” from all sources no later than April 15th of the year following the taxation year. US Persons must also comply with the filing requirements but are granted an automatic two-month extension, meaning they must file by June 15th. Further, all US citizens living in Canada must file their US tax returns every year regardless of whether any taxes are due.
In addition to tax filing requirements, there are also reporting requirements for US Persons that have bank accounts where the aggregate value exceeds $10,000 at any time in the calendar year. Further, there may be reporting requirements and/or possible tax implications if a US Person (1) holds an RRSP (2) obtains a Capital Dividend (3) performs a Canadian Estate Freeze for Canadian tax deferral purposes (4) owns many forms of shares or stock options (5) attempts to take advantage of the $750,000 capital gains deduction available to qualified small business corporations (6) claims the Canadian principal residence tax exemption (in the US the exemption is limited to $250,000 in US Dollars if certain other exemption requirements are met). Note: This is not a comprehensive list of tax and other investment and bank account reporting required under the US tax system for US Persons, but provides a general idea on possible areas where tax issues may arise for US Persons.
2. Penalties for failing to Report
It should be noted that many of these tax laws have been in place for many years. However, perhaps the most significant changes relate to potential penalties and enforcement mechanisms available to the IRS and other US institutions for failure to report. For example, the new Form 8938, which is required to be filed beginning in 2012, relating to US persons holding non-US bank accounts has a $10,000 penalty for failure to file the form. This is but one example of many tax, bank account and investment reporting forms that now have stiff penalties (typically $10,000) for failure to report. Further, failing to maintain filings may trigger unfortunate issues such as denying renewal of that person’s passport or delaying entry to the United States until that person’s tax record is updated or even civil or criminal penalties.
3. The Canadian-US Tax Treaty
It should be noted that US Persons can avoid double taxation through the Canada-US Tax Treaty. Presently, the IRS has set the foreign earned income exclusion for 2012 at $95,100. Generally this means that if your income is below a certain threshold (in 2012 $95,100), that paying additional US taxes may not apply. However, even if there are no taxes owed, the duty to report remains in force at all times. Furthermore, Article XXVI A of the Canada-US Tax Treaty provides for cooperation between Canadian and US governments and agencies in the collection of taxes, interest, penalties and cost.
Due to changes in the enforcement of the Canada-US Tax Treaty and other financial reporting obligations of US Persons, it is recommended that any US Citizens and US Persons meet with a competent accounting professional to ensure compliance with existing and new reporting requirements. Additionally, RBC Dominion Securities Inc. and Price, Comin & Johnson LLP will be holding another educational session in Raymond or McGrath shortly and it is recommended to contact them directly to learn more about upcoming session(s).
Disclaimer: This monthly article is for informational purposes and readers with specific legal issues are encouraged to consult a qualified lawyer for advice appropriate for their circumstances. James can be contacted by email at firstname.lastname@example.org and by telephone at 403.331.5584.