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U.S. Tax Issues for both Canadian and U.S. Citizens - PART 1

Thursday, July 14, 2016

U.S. Tax Issues for both Canadian and U.S. Citizens:
The tax implications involved in cross-border activities are complex and can apply to many situations that face both Canadian and U.S. citizens. Each individual’s personal scenario will be unique when dealing with either business, employment, retirement, or even vacationing across borders. Below are a few highlights to be aware of.

Tax Differences between Canada and the U.S.
Income tax in Canada is based on residence which has a rather broad and flexible definition. The U.S. bases taxation on both residence and citizenship.

This difference is important on many fronts but as a bottom line, a U.S. citizen will most likely file a U.S. tax return each year, regardless of place of residency.

Canada and the U.S. have a tax treaty that will help to reduce the potential and the amount of double taxation. However, using the exemption and treaty is driven by proper filing of both a US 1040 return and Canadian T1. Failure to file these returns accurately and on time may lead to double taxation, denial of expenses and exemptions, and interest charges or penalties. The deadline for filing US 1040 return is April 15, compared to April 30 for a Canadian T1.

United States Citizens:
If you are a U.S. citizen residing in Canada, there is most likely an obligation for you to file a U.S. return and applicable schedules.

The U.S. tax obligation is on worldwide income, regardless of where you live. However, you may qualify for an exemption from income up to an amount of your foreign earnings (i.e. earnings outside of the U.S.) that is adjusted annually for inflation. The amount for 2016 is $101,300 (US), up from $100,800 (US) in 2015.

Requirement for filing the report of Foreign Bank and Financial Accounts (FBAR):

What is it?
FBAR is an information return that summarizes details of a U.S. person’s non-U.S. bank and financial accounts. There is no tax to pay with the return, but as discussed below there can be significant penalties assessed for failure to file on time. Non-U.S. accounts that U.S. person’s can have a financial interest in can include, but are not limited to:

Chequing and savings accounts;

  • Investment accounts (both non-registered investment accounts and Tax Free Savings Accounts);
  • Pension accounts (a Registered Retirement Savings Plan and a Registered Pension Plan account);
  • Accounts in Canadian corporations controlled by U.S. persons;
  • Insurance policies with a cash surrender value;
  • Registered Education Savings Plan accounts.
  • Non-U.S. accounts for which U.S. persons have signature authority, including but not limited to:
    • Joint accounts with their family members;
    • Employer bank accounts;
    • Volunteer organization bank accounts. 

Last year, the IRS announced changes to the filing deadline of the FBAR Form. The due date of the form will now be April 15 instead of June 30. Extension requests will now be allowed to extend the time to file the form. These changes will be in effect for the 2016 tax year.

Who Must File an FBAR?
U.S. persons are required to file an FBAR if:

  • The U.S. person had a financial interest in or signature authority over at least one financial account located outside of the U.S.; and
  • The aggregate value of all foreign financial accounts exceeded $10,000 (US) at any time during the calendar year reported.

Importance of filing the FBAR:
Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation.

As you can see, the penalties for non-compliance can be substantial. It is also easy to fall into one of the categories above for a U.S. person. There are however, some exclusions that can be made to certain individuals that we can discuss with you further. Each individual’s scenario is unique and we can go through your specific situation to determine any filing obligations that may apply.

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Medicine Hat, AB Canada

T1A 8G6

Phone: 403‑527‑8114

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