US Tax Issues for US Citizens and Green Card Holders Living in Canada

Posted on July 26th, 2024 in Cross-border Tax

Filing Requirement

 The liability for US tax is based on both citizenship and residence. Therefore, as a US citizen, you must file annual US income tax returns regardless of where you live. The deadline for filing a US return is April 15th of the following year. However, there is an automatic extension until June 15th if you are a resident outside the US. Alternatively, you can also file a 6-month extension request, which would mean your US return would be due on October 15th.

Failure to file the annual US return and all related forms (noted below) can result in serious financial penalties.

Common Tax Issues

Registered Education Savings Plan (RESP)

• There may be negative US tax consequences for individuals that have set up these accounts as you cannot elect to defer the taxation of income earned in the account.

Tax-Free Savings Accounts (TFSA)

• Like the RESP, you cannot elect to defer the taxation of the income earned in the account. In addition, many US advisors also consider the TFSA to be a foreign trust for US purposes, which as noted above, would mean additional reporting requirements for foreign trusts (Form 3520 and 3520-A).

Canadian Mutual Funds, ETFs & REITs

• If you own Canadian mutual funds, ETFs, and or REITs, the US may consider such investments to be a Passive Foreign Investment Company (PFIC). If you have invested in a PFIC, you are required to complete additional US forms for each PFIC that you own as part of your US return (Form 8621).

Foreign Financial Assets

• Depending how many foreign financial assets you own, you may be required to complete disclosure forms explaining the nature of the investments and the income that each has generated as part of your tax return (Form 8938).

Foreign corporations

• If you own shares of, or control a Canadian private corporation, there can be several implications for your US return ranging from disclosure of information about the Canadian company to the accrual of passive income earned by the Canadian company on your US return (Form 5471).

US Treasury Reporting

• If you have foreign financial assets in excess of $10,000 at any time in the year you must complete the US treasury forms and submit them electronically every year by June 30 of the following year. These forms require details regarding your financial institutions, account numbers, addresses, and highest balances in the accounts (FinCEN report 114, formerly TD F 90-22.1 aka FBAR).

Voluntary Disclosure

If you have not filed US returns, action should be taken immediately. The IRS has set up a voluntary disclosure program called the Streamlined Filing Compliance Procedure. Under this program, if the taxpayer qualifies, they can file the three previous US returns and 6 previous FinCEN reports to get caught up without penalties.

US Estate Tax

US citizens and long-term green card holders are subject to the US estate tax regime. Unlike the Canadian tax system which taxes accrued gains upon death, the US estate tax regime is a wealth tax based on the value of the deceased’s estate. For 2024, every US citizen receives an exemption of $13,610,000 (indexed annually). For estate’s exceeding $13,610,000, the excess will be taxed at the highest estate tax rate of 40%. US citizens living in Canada that have wealth in excess of the exemption should consider estate and tax planning strategies to minimize their US estate tax exposure.