Category: 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.

The Internal Revenue Service (IRS) has acknowledged that there are many US taxpayers outside of the USA who are non-compliant with their US tax filings including Reports of Foreign Bank and Financial Accounts (FBARs) and, as such, are offering special procedures for US taxpayers to become compliant.

The Streamlined Filing Compliance Procedure allows delinquent U.S. taxpayers the opportunity to come forward and avoids possible IRS enforcement action and the large penalties associated with not filing.

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations with:

• a streamlined procedure for filing amended or delinquent returns, and
• terms for resolving their tax and penalty procedure for filing amended or delinquent returns, and
• terms for resolving their tax and penalty obligations.

The streamlined procedures are available to both US individual taxpayers residing outside the USA and US individual taxpayers residing in the USA.  For the purposes of this article, we will focus on US taxpayer’s living outside of the USA.

For purposes of the streamlined procedures, US citizens and lawful permanent residents, i.e., green card holders, are nonresidents if, in one or more of the most recent three years for which the US tax return due date has passed, they (1) did not have an abode in the United States and (2) were physically outside the United States for at least 330 full days.

US taxpayers eligible to use the Streamlined Foreign Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1). The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.

A US taxpayer filing under the streamlined procedure must certify that:

1. they are eligible for the Streamlined Foreign Offshore Procedures;
2. all required FBARs have now been filed; and
3. failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined by the IRS will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.

If returns are properly filed under these procedures and are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.  As with any US tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

If you need assistance in becoming compliant in the USA, we are well-seasoned in this matter and our cross border professionals can help you.

U.S. Rental income

If a Canadian resident receives rental income from real property located in the U.S., they are subject to a non-resident withholding tax of 30% of the gross rental income, which is required to be remitted to the Internal Revenue Service (IRS) by the tenant. The 30% withholding tax cannot be reduced by way of the Canada – United States income tax convention.

Non-residents of the U.S. can also make an election to be taxed as if their rental income was effectively connected with the conduct of a trade or business in the U.S. Furthermore, the taxpayer can deduct expenses engaged to earn rental income and then be taxed on the net income at graduated rates, rather than a 30% flat rate on the gross rent. To make this election and avoid the 30% withholding, a taxpayer must complete form W-8ECI and provide the form to the person who is paying the rent.

To deduct expenses in order to be taxed on your net income, a taxpayer must file a U.S. tax return as a non-resident (form 1040NR). The amount of the tax withheld will be reported on the 1040NR and will get refunded if there is excess tax withheld over the final income tax liability. The tax return must include a statement confirming that an election has been made. The election must include the address of the property, your percentage of ownership, description of improvements made, etc.

A taxpayer only has to make the election once and the election has to be made on each new property. The election will be valid for as long as a taxpayer owns a property and if their 1040NR is filed on time. To file a 1040NR, a taxpayer will need to obtain a U.S. Individual Taxpayer Identification Number (ITIN) by completing a form W-7.

A taxpayer also has to report rental income in the state where the property is located.

Selling U.S. Real Property

If a Canadian resident sells real estate located in the United States, they are subject to a 10% or 15% withholding tax of the gross selling price under FIRPTA (Foreign Investment in Real Property Tax Act). If the property is sold for an amount greater than $300,000 but less than $1,000,000 and the property is being purchased with the intention of being used as the purchaser’s residence, then the sale will only be subject to a 10% withholding as opposed to the 15% rate. The tax withheld will be offset against the U.S. tax liability on any gain realized on the sale and will be refunded if it exceeds the tax liability.

There are two exceptions to the withholding requirement which can reduce or eliminate the requirement.

• The first exception applies if the property is sold for less than $300,000 USD to a buyer who intends to occupy it as their principal residence. The gain on the sale is still taxable in the U.S. and a tax return (1040NR) must be filed.
• The second exception is if a Canadian resident gets a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10% or 15% of the selling price. The certificate will indicate the amount of tax that should be withheld by the purchaser rather than the full 10% or 15%. Ideally, the withholding certificate should be obtained from the IRS before the sale closes. To apply for a withholding certificate a Form 8288-B must be completed and sent to the IRS. A U.S. ITIN must be included on the Form 8288-B or can be applied for by way of a Form W-7 with the Form 8288-B. The IRS will generally issue a withholding certificate within 90 days of submission.

The gain or loss on the sale of a U.S. real property by a non-resident is required to be reported on a U.S. Non-Resident Income Tax Return (1040NR). As a Canadian tax resident the disposition of a U.S. property is required to be reported in Canada. If there is a gain on the sale, the U.S. has the right to tax the gain first and the U.S. tax liability can be claimed as a foreign tax credit against any Canadian and provincial tax on the sale.

Similarly, state income tax may apply on the sale depending on where the property is located.

Please contact your DJB accountant should you wish to discuss this further.