The deadline for Americans living in Canada to file a tax return with the U.S. Internal Revenue Service is less than a week away, but not everyone is scrambling to get their paperwork in order.
“I’m not filing U.S. taxes,” says a Calgary resident we’ll call Joe. “As an accidental American, I’m outraged that a foreign government is going after me for the fact my Canadian parents had me in the U.S. and only stayed there for a few short months.”
Joe, who did not want his real name used for fear he will be targeted by the IRS, considers himself 100 per cent Canadian. He was born in April, 1958 in Pittsburgh, where his father worked for a short time. His birth was registered with the Canadian embassy and his parents returned to Canada in July of that same year.
“I have never earned a penny there,” said the oil patch engineer. In his eyes, the notion that the U.S. government has any sort of claim on his income is “ridiculous.”
In order to come into compliance with U.S. tax laws, Joe estimates he would have to spend up to $50,000 in accounting fees, in addition to the cost and headache of dealing with all the forms. “The tax and legal communities love this, because they will get paid fees. And for what? Canada is not a tax haven and I am not a criminal.”
Unlike other countries, U.S. law dictates that Americans must file tax returns and report their global income every year to the IRS, regardless of where they live and work. That includes Americans citizens, dual American-Canadian citizens and U.S. green card holders. The deadline is June 15 (because this falls on a Saturday this year, the deadline is extended until Monday the 17th) although it is possible to submit a request asking for an extension until Oct. 15.
There are an estimated one million Americans living in Canada, many of whom have not been filing taxes to the IRS. Their circumstances are varied: some are now citizens of other countries, some have one American parent, while others were born in the United States, lived there only a short amount of time, and never voted or worked there.
In recent years, the U.S. government has been cracking down on what it sees as American tax cheats – people hiding money in offshore accounts. Things are about to get worse for Americans, accidental or not, who are hoping they can escape the reach of Uncle Sam. As of 2014, a U.S. law – the Foreign Account Tax Compliance Act – will require Canadian financial institutions to start red-flagging Americans who have Canadian accounts to the IRS.
Wayne Bewick, a Canadian chartered accountant, a certified financial planner and a U.S. certified public accountant who specializes in expatriate and international taxation, says the U.S. bill that averted the fiscal cliff back in January provided some clarity and finality around topics like estate tax and overall tax rates for Americans living in Canada.
“We had clients who did not know whether to wait or do something now,” he said. “And after so much time with uncertainty surrounding these topics, we are not seeing a lot of relief.”
Americans who live in Canada and don’t file taxes, like Joe, should realize that they could be stopped at the Canada-U.S. border and questioned about whether they have filed their taxes. “If the IRS does decide to aggressively pursue U.S. non-compliant taxpayers, he may find himself facing stiff civil and or criminal penalties in addition to monetary penalties for not filing FBARs [Report of Foreign Bank and Financial Accounts],” said Shailja Patel, an accountant who, along with Mr. Bewick, works for Trowbridge Professional Corp.
Mr. Bewick and Ms. Patel gave us this rundown of six things Americans living in Canada should know:
1) American Taxpayer Relief Act
The American Taxpayer Relief Act (ATRA), which was signed into law by President Barack Obama in January, finally provides some clarity for U.S. citizens and green card holders living in Canada. Although the U.S. federal income tax rates did rise for high-income earners, most Americans living in Canada who have not owed any U.S. personal income tax in the past should still not owe anything going forward. *High income earners – individuals making more than $400,000 (U.S.) a year and couples earning more than $450,000 – may owe more tax because they will be in the top tax bracket – they might also owe additional tax because of the new 3.8 percent Medicare surtax (stemming from Obamacare). Rates have increased on qualified dividend income and long-term capital gains, for some individuals.
2) Estate Tax
There is finally some certainty in the area of U.S. estate tax, for Americans in Canada and for Canadians who own U.S. assets, like vacation properties. The ATRA extends the estate tax exclusion that was temporarily introduced in 2011 at $5.1-million to $5.25-million, and the maximum tax rate from 35 per cent to 40 per cent. This is good news, since the exclusion did not drop to $1-million and the tax rate did not rise to 55 per cent, as had been slated to happen.
There are still plenty of Americans in Canada who are not filing U.S. tax returns and Foreign Bank Account Reports (FBAR) on an annual basis. Typically, a U.S. citizen or green card holder living in Canada is required by law to file a U.S. tax return each year. The IRS knows there are a lot of people living in Canada who were not aware of this legal requirement, so in September, 2012, the IRS came out with a new voluntary disclosure program, called the streamlined process. If certain conditions are met, the process allows Americans in Canada to meet their IRS tax obligations without facing any criminal or civil penalties. For Americans who meet its conditions, the streamlined process is the best way to become current with the IRS filing obligations.
4) Foreign Bank Account Reporting
Americans living in Canada who have Canadian bank accounts with an aggregate account value of over $10,000 are required to file a report every year with the IRS, separately from their tax returns. This report is completed on Form TD F90-22.1, Report of Foreign Bank and Financial Accounts (commonly known as the FBAR form). The penalties for not filing this can be substantial. In 2011, similar information was also required to be included in a form filed with the tax return but the filing thresholds were much higher – $200,000 for a single person and $400,000 for a couple with a married filing joint return of aggregate asset value.
5) Registered Retirement Savings Plans
Individuals who have Registered Retirement Savings Plans (RRSPs) are required to file Form 8891 with their U.S. tax return on an annual basis, in order to defer the income earned inside their RRSP from U.S. federal taxes.
6) Registered Education Savings Plans/Tax Free Savings Accounts
If Americans set up Registered Education Savings Plans (RESPs) and Tax-Free Savings Account (TFSAs) there may be additional U.S. tax filings required as these accounts could potentially be considered trusteed accounts. Since from a U.S. perspective these would be foreign trusts, U.S. foreign trust reporting may be required.
Editor's note: *We have changed an earlier version of this story to make it clearer when a new Medicare surtax could kick in.