The first question we need to ask is whether you are actually required to file U.S. tax returns. Generally speaking, U.S. citizens and Green Card holders are required to file U.S. tax returns regardless of where they live. Therefore Americans living in Canada, whether they have recently moved to Canada, or have been in the country their entire lives, are required to file U.S. tax returns, in addition to their regular Canadian tax returns.
Once you have established that you are required to file U.S. tax returns, the next step will be to assess your actual filing requirements. Please keep current with US/Canada tax law changes as they can significantly affect your annual filing requirements.
What forms need to be filed?
Assuming you are above the required income filing threshold, you will need to complete Form 1040 for the current year. The 1040 is the general income tax form, and is really only 2 pages long. The bulk of your annual U.S. income tax filings will be comprised of additional forms and schedules.
What other tax schedules need to be filed?
Outlined below is a list of general forms that may be required. Note that these forms are not always required, and additional forms could be required, based on your particular tax situation:
Form 1040 – As discussed above.
Schedule A – Itemized Deductions: In most cases, especially for U.S. taxpayers in Canada, schedule A will not be required, either because they may not need to itemize, or simply because they have paid enough Canadian taxes to reduce any U.S. taxes owing via Form 1116 – Foreign Tax Credits (see below). Note that itemized deductions changed under the new Trump tax changes. You’ll want to review these changes to ensure proper deductions are allowable.
Schedule B – Interest and Dividends: Schedule B reports interest and dividends from all worldwide sources. Note that Schedule B has some important questions related to FBARs and foreign trusts that need to be accurately answered. See more below.
Schedule C – Profit or Loss from Business: Schedule C reports business activities. For those in Canada remember that Self-Employment (SE) tax otherwise payable on net business profits would be exempted.
Schedule D – Reporting of capital gains and losses: Both gains/losses from Canadian and U.S. sources need to be reported on Schedule D. Canadian security sales need to be converted at their original purchase dates and respective sale dates as well.
Schedule E – Supplemental income and loss: In most cases, Schedule E reports profits and losses from rental activities, however, you will also use this schedule to report royalties earned. Note that special depreciation rules apply to rental properties owned by U.S. citizens. For example, unlike Capital Cost Allowance (CCA) for Canadian purposes, depreciation is mandatory in the U.S.
Schedule F – Profits and losses from farming activities.
Are any other tax forms or disclosures required?
Form 8965 – Health Coverage Exemption: If you live in Canada, and are covered by universal health care, you should be exempt from any additional U.S. health premium taxes.
SE Tax Exemption – If you reside in Canada, and are exempted by the Canada-U.S. social security agreement, a disclosure to this affect will need to be filed with the 1040.
Form 1116 – Foreign tax credit: As you will be reporting your worldwide income on both your Canadian and U.S. tax return each year, you will need to ensure that you do not pay both Canadian and U.S. taxes on the same income. You can claim all the Canadian taxes you have paid on the income reported to the U.S. on Form 1116. Note that Form 1116 is completed separately for general (employment, business, pension, etc.), passive (interest, dividends and capital gains) and resourced (income only taxable in Canada) income. In many cases, you will have several 1116 forms in addition to Form 1116 AMT, if applicable.
Form 2555 – Foreign earned income: Instead of using Form 1116 to reduce U.S. calculated taxes on Canadian income, you can also fully exempt Canadian earned income (employment and business) via Form 2555. For 2015, you will be able to exempt up to $100,800 of earned income from your U.S. tax return.
Form 8812 – Child tax credit: You will need to be careful about claiming this credit if you live in Canada. Technically speaking this credit is only available to taxpayers that have a dependent, that is also a U.S. citizen or resident.
Form 8960 – Net Investment Income Tax (NIIT): Commonly referred to as Obamacare tax, NIIT is additional tax on investment income for taxpayers who exceed a certain income threshold. The threshold for filing status “Married filing jointly”, “Married filing separately” and “Single” are $250,000, $125,000, and $200,000, respectively. Any investment income earned above this threshold will result in an additional tax of 3.8% on this income. Note that foreign tax credits from form 1116 will not be available to reduce this tax, however, NIIT on U.S. source income may be claimed as foreign taxes for Canadian foreign tax credit calculations.
Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund: For those taxpayers that own traditional PFICs or Canadian mutual funds form 8621 will be required to report these investments. Note that not all mutual fund companies issue PFIC statements and you’ll want to ask your investment advisor about owning Canadian mutual funds as a US citizen in Canada.
Form 8938 – Statement of specific foreign financial assets: This form, similar to the FBAR form below, reports specific foreign financial accounts held by the U.S. taxpayer. Unlike the FBAR, however, the filing threshold is much higher, and the reporting also includes accounts such as foreign pensions and life insurance policies.
Form 5471 – Report of controlled foreign corporations: This form will be relevant to Americans with incorporated businesses in Canada. These businesses are considered “foreign” for U.S. tax purposes and therefore require Form 5471 to be filed. The form reports the balance sheet, income statement, and equity statement of the company throughout the year, converted to U.S. dollars.
The form also serves to calculate income that is not eligible to be deferred for U.S. tax purposes. Under U.S. tax law, an individual is not able to defer investment income (and some other specific types of income) within a foreign corporation. This income inclusion is outlined under Subpart F of the U.S. tax code. In essence, any investment income earned in a Canadian company controlled by a U.S. taxpayer needs to be taxed on their personal tax return, regardless of whether they distributed this income within the current period. Specific tax planning is necessary to ensure adverse tax consequences do not result from Subpart F income inclusions.
In 2017 and 2018 the new Trump tax changes included provisions that taxed the retained earnings of controlled foreign companies (Canadian companies controlled by Americans) and active business income of these companies going forward. If you are a US Citizen that controls a Canadian corporation please ensure to get professional advice on how to manage your shareholders and internal earnings of the corporation.
Form 3520/3520-A – These forms may be required if you are the owner, trustee, or beneficiary of a foreign trust (including Canadian trusts). These forms may also be required if you are gifted more than $100,000 from a non-resident alien of the U.S.
Do I need to file any Canada-U.S. Treaty Elections?
The Canada-U.S. tax treaty contains articles that outline how specific types of income are treated for tax purposes between both countries. Often, in order to take advantage of some of the exemptions in the treaty timely treaty elections need to be filed.
Note that these elections are filed using form 8833 Treaty based return position disclosure and late filing of form 8833 can lead to additional penalties. Specific treaty elections are beyond the scope of this article, however if you have specific questions about treaty elections please leave a comment below.
Do I need to file FBARs (Form 114)?
American taxpayers that own foreign bank or investment accounts are subject to Form 114 filing requirements. If the aggregate total “highest balance” in all your foreign financial accounts exceeds $10,000 in the year, you are required to file FBAR forms. As noted above, you will be asked this question on Schedule B. Form 114 is now filed electronically, and can be downloaded and submitted here.
When are my tax returns due?
Your U.S. tax return and payment are due April 15th, however, if you are out of the U.S. on the filing date (which will be the case for most Americans in Canada), your due date is extended to June 15th. Unless you are self-employed, the due date of your Canadian tax return is April 30th. Whenever possible, it is best to file both returns by April 30th.
Are there any penalties for late filing U.S. tax returns?
There are potential penalties for late filing of tax returns and forms, as well as for underpayment of tax. There is a penalty of 5% of unpaid taxes by the due date of the return, up to a maximum of 25%.
There are also penalties for specific forms that may be filed late. For example, Form 114 has a penalty of $10,000 per unreported account, to a maximum of 50% of the highest balance in all the accounts for that specific year. Also, foreign reporting forms such as Form 5471 (Controlled Foreign Corporation Reporting) carry a late filing penalty of $10,000 per year.
Other penalties include accuracy related penalties, unpaid withholding tax penalties, and fraud penalties, to mention a few.
Does the IRS send Notice of Assessments similar to CRA?
No, unfortunately the IRS does not issue automatic filing receipts once the tax returns have been assessed. You can however request a transcript of you U.S. tax return here.
I have investments in the US, should I keep them in the US or move them up to Canada?
We get this question a lot. Americans that have moved up to Canada often continue to have investments down in the US. These investments may include non-registered investments, ROTH IRA, traditional IRA, 401k assets, revocable trust assets and education savings plans. Note that in most cases US advisors are not legally able to manage investment accounts for Canadian residents (even though they may be US citizens).
Have questions on US/Canada tax filing? Contact Phil Hogen.