Canadian Income & U.S. Tax Return (Canada/IRS Tax Guide Summary)
U.S. Taxes for Canadian Residents (or Canadian Citizens/Residents residing in the U.S.) can be a difficult area of law.
Common Questions we receive are:
- How do I Report Canadian Income on a 1040?
- What if I have U.S. Citizenship but no U.S. sourced income?
- What if I live full-time in Canada?
- Do I report my RRSP, RRIF, or TFSA on the 1040?
- Are RRSP, RRIF and TFSA investments subject to FATCA?
- How do I claim a Foreign Tax Credit?
- What is the Foreign Earned Income Exclusion?
The tax laws between Canada and the United States are tough. That is because there are multiple different tax agreements in place between the U.S. & Canada, including:
- Bilateral Tax Treaty
- FATCA Agreement
- Totalization Agreement
- Specific Visa and travel rules
Canada & U.S. Tax
It would be impossible to provide a comprehensive detailed summary in one article (and still keep you awake).
Therefore, we will summarize the main aspects of international tax law as it involves Canada and the United States.
- Income Tax Treaty
- Estate Tax Treaty
- FATCA Agreement & Reporting Institutions (FFIs)
- Totalization Agreement
- IRS Offshore Voluntary Disclosure Options
Income Tax Treaty
The United States has entered into an income tax treaty with Canada. The treaty deals with many different issues involving how each country taxes the other’s citizens/residents on many different issues, including:
- Taxation of Business Income
- Taxation of Retirement
- Passive Income
- Exempt Income
- Investment Income
For example, in a country such as Singapore, where there is no tax treaty, even a Singaporean compulsory retirement plan (CPF) does not receive tax deferred treatment (even though it is a retirement plan, and even if the person resides in the U.S.)
Conversely, if the same person invested in an RRSP, then the retirement will generally receive tax deferred treatment (at the Federal/IRS level) until distributions are taken. As to deferral of contributions, it is more complicated depending on who is making the contribution.
The Canadian and U.S. Bilateral Tax Treaty can be found here.
Estate Tax Treaty
The United States has entered into 19 estate tax treaties with various different countries, but unfortunately the United States has not entered into an estate tax treaty with Canada.
You should speak with an estate planning attorney prior to executing an estate plan, if you are a US person who has significant assets in Canada.
Receiving a Gift or Inheritance From a Foreign Person
If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).
Resources: Form 3520
FATCA is the Foreign Account Tax Compliance Act. It is a US tax law designed to combat offshore tax evasion and facilitate the reporting of foreign accounts.
There are more than 110 countries that have entered into FATCA agreements with the United States, and Canada is one of them. In fact, Canada was one of the first countries to sign the FATCA Agreement.
What Does This Mean to You?
It means that hundreds of thousands of Foreign Financial Institutions (FFIs) worldwide (including Canada) are proactively reporting US account holder information to the United States.
Many FFIs appear to simply be gathering and reporting individuals to the U.S. if there are any ties between the account-holder and United States (current U.S. address, former U.S. address, U.S. citizen or U.S. Legal Permanent Resident status).
FATCA Reporting can have very serious consequences for many reasons:
– Non-Reporting of FBAR (Penalties range from a penalty waiver, all the way up 100% value of the penalty in a multi-year audit and determination of willfulness)
– Penalty Non-Compliance with FATCA Penalties ($60,000 Max)
– Discovery of Nominee or other Unreported Companies not properly reported on Form 5471 or 8865
– Discovery of PFIC (Passive Foreign Investment Companies) and penalties under 8621 (non-monetary, but still intrusive)
– If an Account was used to receive or transfer a monetary gift (s) to the U.S., it may lead to various penalties as well
The United States has made international tax compliance a key enforcement priority, and recently announced several new tax compliance groups designed to focus on offshore and foreign money.
Which Banks in Canada Report U.S. Account Holders?
As of now, there are more than 11,400 Foreign Financial Institutions, within Canada that report US account holder information to the IRS. The list can be found here: Canada FFI List.
What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR Reporting, it may involve a much more broad spectrum of assets and accounts, including:
- Bank Accounts
- Investment Accounts
- Retirement Accounts
- Direct Stock Ownership
- ETF and Mutual Fund Accounts
- Pension Accounts
- Life Insurance or Life Assurance Policies
The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).
As provided by the IRS: “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”
The United States has only entered into 26 Totalization Agreements, including Canada.
We Specialize in Safely Disclosing Foreign Money
We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.