Issues Canadians Face
It is perplexing that our neighbors to the north know a great deal more about the USA than the average US citizen knows about Canada. How many US citizens can sing the Canadian National Anthem – “O Canada” in English let alone in French? Yet there are many Canadians able to sing our Star Spangled Banner. Can you name all the Canadian provinces and territories? And don’t forget that persons in Canada and Mexico as well as the US are “Americans” as we all inhabit North America.
While Canadians tend to know a lot about the United States, they are often caught unaware of the myriad US tax laws and their level of complexity. Come to think of it, those same laws catch a lot of US citizens unaware too. But that doesn’t resolve the potential problems many Canadians face when working and living in the USA.
As a result of the UBS Swiss Bank promotion of tax fraud for US Citizens, Congress and the IRS have made substantial efforts in complicating our lives and subjecting many too onerous penalties and reporting requirements. When working with a number of Canadian clients, most did not even realize they had any issues let alone were at risk for significant penalties.
Some of the most common areas that catch Canadians unaware are summarized below:
Canadian retirement accounts – RRSP, RRIF, etc. & educational savings accounts are often not reported to the IRS under the FBAR – Foreign Bank Account Reports.
Good News: The IRS just announced in October 2014 that Canadians and US citizens with money held in RRSP’s and RRIF’s will no longer be required to report these accounts within their US income tax return. The earnings within the retirement accounts will not be taxed until funds are withdrawn! This relief from IRS reporting is retroactive. The Form 8891 is being eliminated by the IRS.
While the Form 8891 has been eliminated, this action by the IRS DOES NOT eliminate the requirement to include the RRSP or RRIF on your FBAR Form 114 due June 30 and on your Form 8938 – Report of Foreign Financial Assets on your Form 1040. U.S. Taxation of Canadian Citizens 2 Copyright 2014 by Steven E. Miller, CPA PC
Living in the US while investing in foreign mutual funds creates a significant tax issue regarding Passive Foreign Investment Company law. Failure to make a timely and proper election has very negative US tax results.
The timing of when you enter the USA for an extended stay may have serious income tax implications. Review the section on this website discussing the taxation of non-resident aliens.
Entering the USA one day too late or departing the USA one day too early may cost you thousands in additional taxes.
Distributions from Canadian retirement plans while living in the US can be expensive. Timing of the distributions should be planned carefully in advance.
Canadian estate taxes work in a different manner than US estate taxes. This can create substantial issues if one or both spouses are Canadian while living in the USA.
The following is a case study example I presented recently at a national conference of CPA’s. The objective was to provide a bit of insight for tax practitioners. Typically they don’t ask a lot of questions about a client’s background or family history. That can lead to trouble for both the client and the tax practitioner.
Case Study: Mark was born in Canada and lived there for many years. In his 30's, he moved to the US and obtained a Green Card. His parents are deceased and his siblings still live in Canada. He owns his own business that operates only in the USA.
Having lived in Canada, a Canadian retirement account is likely - RRSP or RRIF. Watch out for Canadian educational savings accounts as well.
If one or more parents have passed, inquire about inheritance. I saw a case recently where he had inherited in partnership with his sibling various real estate rental properties in Canada. This entailed foreign bank accounts, unreported foreign rental income and a host of other issues revolving around tax forms not included in his US return. He was unaware of any tax problems until I asked a number of probing questions on family history.
When dealing with deceased parents, be on the watch for foreign trusts and taxable distributions from the foreign trusts requiring Form 3520 & Form 3520-A.
Cross border gifting can create a reporting requirement. Gifts from foreign nationals of $100,000 or more in a year require the filing of Form 3520.