Do Canadian/U.S. Citizens Have to Report Accounts to the IRS

Do US/Canadian Citizens & Residents Report Accounts to the IRS?

Canada Tax Guide for US Expats Abroad

While there are many different countries that US Person Expats travel to, Canada is a final destination for many Expats seeking to relocate outside of the United States and to a country with beautiful countrysides and sprawling cities and suburbs — and is one of the nearly 60 countries that has entered into an international tax treaty with the United States. This may prove very beneficial to US Taxpayers who have retirement plans, including RRSP and RIFFs – or those who have relinquished/renounced their United States citizenship or permanent residency — but are still interested in an E-2 Tax Treaty. Let’s go through the basics of ten important facts for Expats who are residing overseas in Canada:

US Taxes Until Formal Expatriation

One of the most common misconceptions that US Expats have is that if they relocate overseas, they are no longer required to pay U.S. tax on foreign earnings — but that is incorrect. Unless a person formally expatriates and relinquishes their green card — or renounces their US citizenship — they are still considered a US Person and are still required to pay U.S. tax on their worldwide income.

Treaty Benefits May Apply for Canadian Residents

If a person is considered a US person, they may be able to make a treaty election using form 8833 and elect to be treated as a foreign person for U.S. tax purposes (generally excludes U.S. citizens). In this scenario, the Taxpayer may qualify to file a Form 1040NR as a nonresident instead of a form 1040 — and they only have to pay U.S. tax on their US-sourced income (FDAP and ECI).

Foreign Earned Income & Housing Exclusion (FEIE)

US persons who reside overseas and qualify for either the Physical Presence Test or Bona-Fide Residence Test can qualify to exclude up to about $108,000 of their US income from their U.S. tax return — as well as claim a housing credit for a portion of the rent and other costs associated with foreign housing. If a person qualifies for the Foreign Earned Income Exclusion they must still file the tax return and include a Form 2555 — couples filing joint tax returns can each claim the earned income exclusion but cannot double-dip on the housing exclusion.

Foreign Tax Credits (FTC)

When a person pays tax overseas on income they earned abroad, they may be able to claim a foreign tax credit against any taxes that would otherwise be due on the same income on a US tax return. It is not always a dollar for dollar credit — and if a person claims the foreign earned income exclusion for earned income they cannot double-up on the same dollar using both the credit and the exclusion — but they may still have some remaining credit available depending on how much income they earned after applying the earned income exclusion. In other words, if a person earns significant income from employment — above the foreign earned income exclusion amount — they may be able to still claim a foreign tax credit on the additional income for the portion not exempted by the FEIE.

CANADA Pension & US Tax

The CANADA Pension Plan typically grows tax-free, depending on the type of plan and if it qualifies under the Treaty. Since it is a foreign pension, it may qualify as not taxable during the growth phase from a U.S. tax perspective — but some IRS agents may take the position that the growth is still taxable since it is not a qualified plan. You should speak with a Board-Certified Tax Law Specialist before taking a position on your tax return.

CANADA Pension & US Reporting

Even if the Canada Pension Plan is not taxable, it is still a reportable foreign financial account that must be disclosed on various different international information reporting forms such as the FBAR and FATCA Form 8938.

FATCA and Form 8938

FATCA is the Foreign Account Tax Compliance Act. US taxpayers generally comply with FATCA by filing a Form 8938 (above). The Foreign Financial Institutions (FFI) may send expats and other US persons a FATCA letter or KYC Letter to ascertain whether the individual is a US person even if they are residing outside of the United States as an expat. This may lead the FFI to report the Taxpayer to the IRS.

Foreign Account Reporting & FBAR (FinCEN Form 114)

When a US person has foreign bank accounts and other financial accounts with an annual aggregate total that exceeds $10,000 on any given day in any year, they have to report the accounts on the FBAR (aka FinCEN Form 114). The form is filed electronically directly on the FinCEN website.

Foreign Gifts & Form 3520

Here is a common scenario: A US citizen has moved back to their home country. They may possibly have dual-citizenship but their immediate family resides overseas. They receive a large gift or bequest from a family member who is a nonresident alien, such as when a grandparent or parent passes away and leaves a gift to multiple siblings — and the US Expat may be the only US person sibling. The expat is still required to report the gift on Form 3520 and the failure to do so can lead to some steep penalties.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.