The U.S. citizens living in Canada are obliged to pay not only Canadian taxes but also U.S. taxes. Suppose someone living in Canada was born in the U.S., became a naturalized U.S. citizen, and has at least one parent who is a U.S. citizen. In that case, they have to pay U.S. taxes. U.S. citizens living in Canada have to face numerous tax issues. Here are the top 10 problems faced by Americans living in Canada:
1. S. Tax Filing Obligations:
Typically, American citizens in Canada have to file the U.S. income tax return and make other monetary disclosures to IRS. For example, As an American living in Canada exceeding the IRS’s income threshold, you need to file your income tax return. You also need to file FBAR (Foreign Bank and Finacial Accounts) separately from your income tax return if your accounts surpass U.S.$10,000.
2. Non-Compliance with U.S. Filing Obligations:
S. tax laws are complex. Americans abroad may not have a complete understanding of these laws. They may easily be non-compliant with U.S. tax filing responsibilities. Nevertheless, the IRS has a set of voluntary disclosure programs and easy to follow procedures to relieve American taxpayers unfollowing various obligations as per tax laws in the U.S.
3. Canadian Registered Accounts:
Registered accounts in Canada, such as RRSP (Registered Retirement Savings Plan), RESP (Registered Education Savings Plan), and TFA (Tax-Free Savings Account), may probably be offset by U.S. compliance obligations and applicable American taxes. If you face such an offset, you should contact a tax advisor to resolve this issue.
4. Tax Implications of Moving a U.S. Retirement Plan to an RRSP:
Usually, it is not a good strategy to transfer a U.S. retirement plan to an RRSP. A tax specialist can, however, help you navigate uncharted territory. They will inform you whether it is a good idea to transfer funds from the U.S. plan to Canada or not.
5. Canadian Home Ownership and Qualification for the Principal Residence Exemption:
According to the U.S. tax laws, you will not be exempted from tax obligation if your capital gain does not exceed the IRS’s maximum amount selling a home in Canada as an American.
6. Business Ownership and Canadian LCGE (Lifetime Capital Gains Exemption):
According to the Canadian Income Tax Act, Canadians may be entitled to LCGE, but according to U.S. tax laws, there is no such exemption for Americans in Canada, and they must pay taxes at a specific rate on the total gain of QSBC (Qualified Small Business Corporation) shares.
7. Impact of PFIC (Passive Foreign Investment Company) Rules:
S. tax implications are unfavourable. U.S. citizens in Canada need to consider PFIC rules if they plan to purchase Canadian mutual funds/ETFs classified as corporations as per the U.S entity classification rules.
8. S. Estate Tax:
As an American in Canada, you may be subjected to both the Canadian and U.S. regimes upon your death. You will be subjected to that tax on the fair market value of your worldwide estate tax at the time of your death. This will include the property owned, no matter its location.
9. S. Gift Tax Regime:
According to the U.S. tax law, as an American in Canada, you gift a property to someone for free, then you will be imposed a gift tax as a donor. However, if the donor gives the property to an American-citizen spouse, the gift tax is not set.
10. Renouncing U.S. Citizenship:
If you decide to renounce your U.S. citizenship, you will be contemplated as a non-resident of the U.S. for income tax purposes. If you do that, you will be required to pay U.S income tax for only U.S.-sourced income, estate & gift tax on the U.S. property. It is better to approach a tax advisor first if you want to give away your American citizenship and live in Canada.
All Americans residing in Canada or anywhere else in the world are obligated to the U.S. tax issues. Some common problems faced by U.S. citizens living in Canada include the U.S. tax filing obligations, Canadian registered accounts, U.S. gift tax regime, and renouncing U.S. citizenship. If you live in Canada and qualify as a U.S. citizen, you should consult a tax consultant to help you deal with the issues concerning taxes.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.