US Income Tax Issues for. Expatriate Canadians Americans that have lived in Canada Relocations to the USA.
Americans that have lived in Canada
Relocations to the USA
Bradley Kirschner, TEP, CA, CPACertified Public Accountant since 1972Society of Trust and Estate PractitionersTen years trust tax banking experienceIndividual tax practice for 25 yearsChartered Accountant in British Columbia since 2004
Topics to be CoveredResidence for Tax PurposesThe Canada – US Income Tax TreatyComparison of Individual Income Tax SystemsLeaving CanadaFirst year in the USCommon Compliance IssuesRRSP/RRIFNon-US Bank and Financial AccountsControlled Foreign CorporationsMutual FundsTax Free Savings AccountsRegistered Education Savings PlansRecords to maintainUsing Grandma’s Canadian AddressCanadian Rental Property
ResidenceImmigration – Visa holders are non-residentsIncome Tax – Residence is a mechanical 183 day testResident – tax on worldwide income plus disclosureNon-Resident – tax on US source income only
Canada – US Income Tax TreatyWill normally override the law in both countriesLast amended in 2007Article IV contains tie-breaking provisions for determining residencyPermanent HomeCentre of vital interestsHabitual abodeCitizenshipCompetent authority
Individual Returns for each spouse Potential Joint Returns
Income from all sources Income from all sources
Less limited deductions Less limited deductions
Taxable Income Adjusted Gross Income
Less itemized or Standard Deduction
Less Personal Exemptions
Taxable Income Taxable Income
Canada USFederal Tax Federal TaxLess CreditsPersonalMedicalCharitable ContributionsLess Foreign Tax Credit Less Foreign Tax CreditProvincial Tax (except Quebec) (State taxes administered by each State)Less CreditsPersonalMedicalCharitable ContributionsLess Foreign Tax CreditNet Provencal TaxNet Tax before payments Net Tax before payments
Leaving CanadaCanada taxes worldwide income earned while a resident plus Canadian sources.Departure Tax – deemed to have sold all property at FMV (Except Canadian Real Estate)RRSP accounts remain untaxed until distributionNon-business Canadian Income subject to withholding
First Year in the United StatesNon-Resident(Does not meet the 183 day test)Only US source income subject to taxNo joint return with spouseNo Standard DeductionLimited Itemized DeductionsIncome TaxesCharitable ContributionsMiscellaneous Deductions
ResidentDual Status YearUS source income prior to residence subject to taxWorldwide income after residency starting date subject to taxNo joint return with spouseNo Standard DeductionAll Itemized Deductions available
Election for Married CouplesTreated as full-year residentsWorldwide income for the year subject to taxFile a joint returnStandard deduction availableDouble taxation reliefForeign Earned Income ExclusionForeign Tax Credit
Election to be Treated as a ResidentMust meet the 183 day test in year twoResident from the residency starting date in year oneWhy?Tax on worldwide incomeAll itemized deductions are available Joint return election if married
Common Compliance IssuesRRSP/RRIFCanada will withhold tax at distributionNot a US qualified planIncome taxed today in the USIncome taxed upon distribution by Canada(Double Taxation)Election under the Treaty to defer tax until distributionMust File Form 8891
Non-US Bank and Financial AccountsMust file the FBAR – Form TD F 90-22.1if the total of the maximum values of all accounts is $10,000 US or moreIncludes Bank Accounts, RRSP, Securities, Mutual FundsIf the total of the maximum values of all accounts (expanded definition) exceeds the threshold, must file Form 8938, Statement of Specified Financial Assets.Significant Penalties come with each form.
Controlled Foreign CorporationGenerally 10% or more ownership, but complex tests to determine who must file.Reporting of the financial information of the foreign corporation.May result in the current US taxation of the Shareholder’s share of certain foreign income. This is similar in concept to the Canadian taxation of Foreign Accrual Property Income (FAPI)
Canadian Mutual FundsReportable on the FBAR form.May be a Passive Foreign Investment Company (PFIC).Costly in terms of current taxation & compliance.If a PFIC, must prepare Form 8621- Return by a Shareholder of a Passive Foreign Investment CompanyApplies to taxable accounts—not RRSP.Don’t hold Canadian Mutual Funds
Tax Free Savings AccountsRegistered Education Savings PlansBoth are currently taxable in the USUS Reporting RequirementsForm 3520-A - Annual Information Return of Foreign Trust with a US OwnerForm 3520 – Annual Return to Report Transactions with Foreign Trust and Receipt of Certain Foreign Gifts
Records to MaintainAssets subject to the Canadian Exit Tax (deemed sale at Fair Market Value) have a US tax basis of FMV at date of immigration. You should maintain a record of those values.RRSP/RRIF distributions will taxed by the US as an annuity—you should maintain a record of your investment in the account and the value at the time of immigration.
Canadian Rental PropertyWithholding required at 25% of gross rents.Can file a Section 216 Return and pay tax on the net rental income.Can file a form NR6 and have withholding on estimated net rental income.Must file a Section 216 ReturnLong-term implications of claiming Capital Cost Allowance (Depreciation).