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US Retirement Impact of Working and Living in Canada

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Steven E Miller, CPA PC

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Working & Living in Canada?

Important Things to Keep In Mind for US Taxpayers

Many US citizens and resident aliens work or have worked in Canada. Many of these workers have participated in the Canadian version of our 401k plan.

RRSP or RRIF type plans allow Canadian based workers to make tax deductible contributions into these retirement plans and enjoy a current tax deduction. Given Canadian income taxes are significantly higher than US tax rates, that seems like a “no-brainer” doesn’t it?

But wait a minute. There are catches.

As a US citizen you are taxable on your world-wide income.  You are required to file an annual US return even if you are living and working in a different country than the good old USA. 

So it raises the question: “Is a pension contribution deductible in Canada also deductible for US taxes?

For many countries, a tax-deductible pension contribution or employer “matching” contribution are NOT tax deductible or tax-deferred like you would experience with your 401k.  The good news is that thanks to the US-Canada income tax treaty, these tax deductible contributions in Canada are also tax deductible in the US.  But wait!  There’s more.

It just couldn’t be that simple, right?  Right.

The US has added a lot of complex reporting requirements for their citizens whether they are working abroad or not.  These reporting requirements are all tied to foreign financial assets of many kinds including foreign retirement accounts, foreign life insurance, ownership in foreign corporations, partnerships, LLCs and so on. 

And many foreign retirement accounts are treated by the IRS as a “foreign trust.”  Foreign trusts with US beneficiaries force the US person to file a complex form known as Form 3520.

But we have more good news! 

Once again, the US-Canada treaty saves you from having to file this form for Canadian retirement accounts.

However, you aren’t entirely off the hook.

When you are living and working in Canada, you will typically have at least one Canadian bank account, maybe some investments, a savings account and your RRSP or RRIF. 

When the value of those combined accounts reaches a mere $10,000, you must file annually the Form 114 – Report of Foreign Bank Accounts [FBAR] or face penalties beginning at $10,000 and going all the way to criminal prosecution for egregious evasion.

Very often, you will have to file the Form 8938 –Statement of Specified Foreign Financial Assets or risk facing more onerous penalties.  The filing requirement for this form depends on whether you are living abroad or back in the USA.  The threshold begins at $50,000 in value and varies by filing status, timing and where you live.

What we see is many who have lived and worked in Canada then returned to the USA are completely unaware of these requirements.  Also, many US citizens living and working in Canada are blissfully uninformed.

The problem is the IRS is aggressively seeking such taxpayers because the penalties are large and the money in the retirement accounts makes for easy pickings.  It is difficult to argue you can’t pay the $50,000 in penalties when the retirement account balance is $100,000.  Know what I mean?

This is also important information for those who have recently gone to work in Canada or who are considering an assignment in the land of the Maple Leaf.

For those that are shocked and awed and are just realizing they may have a problem, my advice is to not panic.  Seek advice immediately from experienced international tax professionals that work in this area.  Your typical tax preparer or even CPA is unlikely to have the experience to guide you through addressing these problems.  They can be fixed but if the IRS taps you on the shoulder first, you are going to have an unpleasant experience.

[RRSP – Registered Retirement Savings Plan]

[RRIF – Registered Retirement Income Fund]

Did You Know? Additional Considerations for Tax Filings & Tax Penalties:

Other US filing complications may arise when you have invested in a foreign mutual fund.  The Passive Foreign Investment Company filings are very complex.

Ownership in a Canadian or other foreign corporation often requires the filing of Form 5471 or face a $10,000 penalty per year.

Contributing cash or other assets to your investment in a foreign corporation (such as a vacation home in a Caribbean island owned by your corporation) requires the filing of Form 926 or face a $10,000 failure to file penalty.

Failure to disclose on Form 5472 a 20% or more foreign ownership interest in a US corporation subjects you to a $25,000 per year failure to file penalty.

These are just a few of the potential land mines a US taxpayer faces when they are involved in investing or working with international interests.  Investigate carefully and thoroughly before you take action.

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15150 Preston Rd. Suite 210 , Dallas, TX 75248
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