U.S. Citizens in Canada
Do you require a US tax return?
Unlike the Canadian tax system that taxes based upon residency, the United States taxes all of their citizens regardless of where they live. As a US citizen you are required to file an income tax return each year and report your worldwide income. In addition, there may be several other filings that may be required as discussed below.
Report of Foreign Bank and Financial Accounts (FBAR)
A United States person must file an FBAR report if the combined value of all of their bank, investment, TFSA, and RRSP/RRIF accounts was over $10,000 at any time during the year. This form must be filed every year by June 30th.
Form 8938 Statement of Specified foreign financial assets
This form will be required by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. The information reported is similar to the Financial Bank Account Reporting but does require some more specific information; furthermore, the filing of form 8938 will not relieve you of the requirement to file the FBAR form. The filing threshold for this form is as follows:
- Filing status of single or married filing separately – Had over $200,000 at the end of the year or $300,000 at any time during the year.
- Filing status of joint – Had over $400,000 at the end of the year or $300,000 at any time during the year.
- Please note that these thresholds are for US persons not residing in the United States. If you currently reside in the US and have specified foreign financial assets please contact our office to determine your filing requirements.
Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF)
In Canada, income earned in either an RRSP or RRIF account is not taxed until the funds are withdrawn. In order to defer the reporting of the income on your US return to match the reporting on your Canadian Return, form 8891 must be filed for each year for each RRSP/RRIF that you own.
If you are the owner of a Canadian or other foreign trust, transferred funds into a trust or received a distribution from a trust, then you are required to file form 3520 Annual Return to report transactions with foreign trusts. This form is attached to your US personal tax return each year. There are large penalties for non-filing or late filing of these forms.
In addition, the trust itself is required to file form 3520-A if the trust has a US owner. This form is filed separately from your personal tax return and is due on the 15th day of the 3rd month after the year end of the trust, generally March 15th (if the trust has a December 31st year-end).
Tax Free Savings Accounts (TSFA)
Tax Free Savings Accounts were first introduced in 2009 to provide Canadians with another tax free option for retirement savings. Unfortunately, unlike the RRSP/RRIF plans, there is no mechanism to make these plans tax free in the US. Earnings from your TFSA are required to be reported on your US personal tax returns. In addition, TSFA’s may be classified by the IRS as a foreign trust and therefore require the additional filing discussed above. An investment in a TFSA is not recommended for US citizens since they are not tax free in the US and may require onerous reporting.
Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP)
Both RESP and RDSP accounts are classified by the IRS as foreign trusts. As foreign trusts they are also subject to the annual filing of forms 3520 and 3520-A. If possible, these plans should be held by a non-US person to eliminate negative tax consequences and trust filing requirements.
Canadian Mutual Funds
The IRS has recently determined that most Canadian mutual funds fall under the rules for Passive Foreign Investment Companies (PFIC). As such you are required to file form 8621 Information return by a shareholder of a passive foreign investment company for each mutual fund that you held during the year to report your share of the funds income. This creates a mismatch in income reporting for the fund on the Canadian return vs the US return and will ultimately result in double taxation.
If you own more than 10% of a Canadian or other foreign corporation, you are required to file form 5471 to report financial and other information regarding the corporation. This form is attached to your US personal tax return each year. Again, there are large penalties for failure to file and late filing of these forms.
The annual filing deadline for US personal income tax returns is April 15. There is an automatic extension to June 15th for US citizens living in Canada. It is important to timely file your US income tax to avoid penalties.