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US Citizens in Canada: IRS Issues Guidance

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Given the prominent media attention garnered in 2011 many reading this article have likely been informed of the onerous tax reporting requirements of US Citizens living in Canada.

To provide a brief summary, all US Persons (US citizens and green card holders) regardless of residence are required to file annual US personal income tax returns and are subject to tax on worldwide income. In addition, other filings may be required such as disclosing interests in foreign bank accounts (Report of Foreign Bank and Financial Accounts – “FBAR”), Canadian RRSP’s, registered education savings plans (RESP’s) and certain interests in Canadian private corporations.

To alleviate the burden of double taxation (as Canada will also tax income earned by individuals “resident” in Canada) the Canada – US Tax Convention provides rules that establish the right to tax certain sources of income and also allows for taxes paid in one jurisdiction to offset taxes owing to the other country. In most cases there is no ultimate US income tax liability as exemptions are available for individuals residing in Canada and due to the fact that Canadian personal income tax rates are slightly higher than those of the US.

Failure to file any of the above noted returns can generally subject individuals to significant monetary penalties. As an example, failure to file FBAR forms can potentially result in penalties of up to $10,000 per violation. That said, in December 2011 the IRS issued a fact sheet (FS-2011- 13) outlining information for U.S. citizens or dual citizens residing outside the U.S and clarified the basis for avoiding the penalties for not properly filing income tax returns or submitting the appropriate FBAR forms. In the fact sheet, the IRS states that penalties would not be imposed in all cases of non-compliant persons.

The IRS indicated that taxpayers who owe no U.S. tax (e.g., due to the application of exclusions or foreign tax credits) will not be subject to penalties for failure to file income tax returns. In addition, no FBAR penalties apply to violations that the IRS determines were due to “reasonable cause,” based on a consideration of the facts and circumstances.

For those individuals who are delinquent in filing the appropriate returns, it is advisable to consider getting up to date given the recent guidance and the considerable uncertainty moving forward as the IRS attempts to extend its reach and obtain more and more information on US persons with undisclosed foreign assets.

The deadline to file a 2011 US Personal Income Tax Return is April 17, 2012. The relevant FBAR reporting is required by June 30 each year.

Jason J. Melo, CA, CPA, CFP is a Tax Principal with Collins Barrow Leamington LLP. He specializes in advising clients in a wide variety of both personal and corporate tax matters, including cross border taxation, succession planning and estate and retirement planning.

Please contact Jason at 519-326-2666 should you require assistance with these or any other US tax matters.

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