There is a massive amount of cross-border activity between the US and Canada. Complicating matters is the IRS, that has strange and unexpected tax rules. Our team of tax attorneys, tax specialists and CPAs help Canadians in the US and Americans in Canada successfully deal with all the challenges caused by citizenship based taxation, the Foreign Tax Compliance Act (FATCA) and the Bank Secrecy Act's FBAR/FinCEN Form 114 reporting.
Along with FATCA and FBAR filings, below are Canadian-specific tax issues our team of tax attorneys, CPAs, and tax preparers assist our Canadian clients with.
Canada specific tax issues
- RRSPs (Registered Retirement Savings Plans) are now exempt from trust reporting, and the contributions can be deferred income.
- TFSAs (Tax-Free Savings Accounts) – There is little guidance to say if these should be treated as foreign trusts, foreign corporations, disregarded entities, or income that flows directly to the taxpayer. We do case by case analysis on these accounts.
- RESPs (Registered Education Savings Plans) and RDSPs (Registered Disability Savings Plans) are treated as foreign trusts that need to be reported on IRS Form 3520/A, and the income must be reported on a US return annually.
- PFICs (Passive Foreign Investment Companies) are treated as mutual funds.
- There are specific tax credits for Canadian tax and sourcing rules.
- Canadian bonds and Canadian guaranteed investment certificates (CDs) get OID treatment when they are held for more than one year.
US-Canada Tax Treaty Information
The US has a tax treaty with Canada. Under tax treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "savings clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.
Additionally, as part of the Treaty, the two countries have mutual agreements in place to collect taxes on behalf of the other country. For instance, Canada can collect taxes on a US person who is living in Canada.
Are you a US person living in Canada?
The US taxes its persons on a worldwide basis. So what you earn in Canada, even if it is taxed by the Canadian taxing authority, is subject to additional taxes by the IRS. This is true even if you have a "tax-free" account in Canada. However, you are entitled to a credit for taxes paid. In the alternative, there is a foreign income exclusion which will exempt a portion of your income from income taxes.
Are you a Canadian person living in the United States? (Visa/Substantial Presence Test)
If you are a Green Card holder you are subject to universal taxing jurisdiction on all your income, anywhere in the world. If you are a visa holder the rules are a bit more complicated about when universal taxing jurisdiction is triggered.
Foreign Earned Income Exclusion
Citizens and residents living and working outside the U.S. may be entitled to a foreign earned income exclusion that reduces taxable income. In addition, you may exclude housing expenses, but with limits. There are limits and special rules about who qualifies for the exclusion, and we can help you understand if you qualify.
Foreign Tax Credits
This is a non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings. The foreign tax credit is available to anyone who either worked in a foreign country or has investment income from a foreign source. There are qualifying factors, and we can help you understand if you are eligible to tax advantage of this credit.
Offshore Voluntary Disclosure Programs
If you have made a mistake in previous IRS tax filings, or haven't filed at all, we can help. We are the nation's premier offshore disclosure firm. We have helped thousands of Canadians and others from around the globe properly disclose to the IRS. We can help you too. Click here to visit our Offshore Disclosure summary page.
If you would like to speak to us regarding any of these issues, contact us to schedule a consultation at 888-727-8796 or email info@irsmedic.com.
