Financial Focus: U.S. citizens in Canada and taxes

By Craig Elder on April 6, 2019.

Being so close to the border there are quite a few people in southern Alberta and Saskatchewan that have close ties and relations in the U.S. Some “Canadians” have U.S. citizenship because of a parent being born American, but because they never spent any time living in the U.S. they never thought they needed to do anything when it came to taxes. The United States is one of the few countries in the world that taxes U.S. citizens and green-card holders on their worldwide income no matter where they reside. Furthermore, U.S. citizens who reside in Canada are also subject to Canadian income tax on their worldwide income. Although the Canada-U.S. Income Tax Treaty (“Treaty”) in many instances minimizes or eliminates double taxation, if you are a U.S. citizen resident in Canada, you should be aware of situations where you may be subject to double taxation or where you may need to satisfy additional U.S. reporting obligations.

For example, if you are employed in Canada, your employment income is subject to tax in Canada, which, in this case, has the first right to tax. You must also report this income on a U.S. tax return. The U.S. may allow you to claim what is referred to as a “foreign-earned income exclusion” and a “foreign housing exclusion or deduction” to reduce your U.S. taxable income. You may also claim foreign tax credits for the Canadian tax on that income. The U.S. allows you some discretion in making deductions or claiming foreign tax credits, so it is wise to have a qualified cross border tax specialist help you determine which ones you should claim.

After claiming these exclusions, deductions or foreign tax credits you may not have any taxes payable on your U.S. income tax return. Since Canadian income tax rates are generally higher than U.S. rates, you will likely accumulate excess foreign tax credits on your U.S. return because you may not require all of the Canadian tax paid to offset your U.S. tax liability. You are still obligated to file a U.S. income tax return even if your U.S. tax liability is nil. On IRS Form 1116, the foreign tax credit form filed with your last U.S. tax return, you can determine the amount of excess foreign tax credits you have accumulated. These can be carried back one year or forward 10 years.

The biggest change to come to the tax issues of U.S. citizens living in Canada is with the new Foreign Account Tax Compliance Act (FATCA). On March 28, 2010, President Obama signed the FATCA into law. FATCA is intended to combat offshore tax evasion through increased reporting and a possibly higher U.S. withholding tax requirement for payments to U.S. taxpayers who have accounts at non-U.S. financial institutions. Starting in 2014, FATCA may require non-U.S. financial institutions (such as foreign brokerage firms, banks, insurance companies) to identify U.S. citizens who have foreign accounts and provide information to the IRS on them

These requirements are in addition to U.S. Qualified Intermediary (QI) agreements. Under QI agreements, U.S. citizen investors must complete IRS Form W-9 and provide their social security number, which allows financial institutions to exempt them from U.S. withholding tax. The procedures under FATCA may be required by all financial institutions that are QIs. If FATCA requirements are not followed or the investor refuses to provide the information, a 30% U.S. non-resident withholding tax may be levied on income payments from these accounts. A detailed discussion of FATCA is beyond the scope of this article. With this new level of enforcement, the IRS may be able to more easily identify U.S. citizens who have failed to file U.S. federal income tax returns and other information returns and disclosures. In any case you should make sure you have all the right information from a tax advisor that understands these complex issues.

A. Craig Elder, CFP, FMA, CIM, FCSI, is a Vice-President, Portfolio Manager and Wealth Advisor with RBC Dominion Securities Inc. in Medicine Hat. RBC Dominion Securities is a member of the Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this column. For more information on this and other financial strategies, contact Craig at 403-504-2723

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