Monthly Archives: November 2013

Canada-US Income Tax Preparation

US and Canadian income tax are similar in objectives but different in all details.  The similarity in objectives is because both governments want citizens and residents to do the same things, that is work hard, earn a paycheck, support your kids and send them to school, and save for your old age.

All of the details are different because the Canadian tax laws are prepared by the finance department. The Finance Minister is not concerned with local effects so he takes a broad view. The US tax laws are prepared by Congress, with about 535 different legislators taking part, with each one hoping to reward his voters and his campaign contributors. If not he wants to at least tell them that he introduced a legislative amendment that would have helped them if it passed. This is why the US tax code is about 80,000 pages and the Canadian is about 700 pages.

The US taxes its citizens no matter where they live in the world. I believe that Eritrea is the only other country that does this. When a Canadian citizen leaves Canada he pays taxes on all the previously-untaxed capital gains achieved during his stay and has no further tax reporting liability until he re-enters Canada unless he has Canadian-source income.

The US government goes to great effort to keep track of any financial transactions performed out of the country by its citizens. It has required citizens who have foreign financial accounts with a maximum combined value of $10,000 or more to file form TD F 90-22.1 for more than 30 years. In 2005 they introduced form 8891 to track the value of Canadian Registered Retirement Savings Plans. In recent years they have introduced form 8938 to ask for more information about foreign financial accounts. The most intrusive of all takes effect January 1 of 2014. It requires financial institutions that are outside the US to report all accounts owned by US citizens to the IRS. Most banks have responded by closing all accounts owned by US citizens. This is utter nonsense. The US has as much right to order Zimbabwean banks to obey US laws as the Zimbabwean government has to order US banks to obey Zimbabwean law. A sane person would expect legislators, most of whom are lawyers, to remember Law 101 and the first lesson, which should have been jurisdiction.

There is a tax treaty which is intended to make clear rules about cross-border income issues so that the taxpayer will pay tax once and only once on each income item. Normally he or she takes a credit on the second return for the tax paid on the first return.

When a person has to file taxes in both countries it is nearly always advantageous to have them prepared together by the same person.

US Citizens Beware!

The US requires all citizens and green card holders to file tax returns and reports on non-US financial accounts no matter where in the world they live. The only exceptions are those whose income is below the minimum, and those who have less than $10,000 in all of their non-US financial accounts combined.

If you are a US citizen or green card holder these requirements, expecially those related to financial accounts, can be a big problem.

There are hefty, very hefty, fines for not filing reports on these financial accounts. There is rarely tax owing. For US citizens working in Canada it is possible to take credit for taxes paid to Canada, including Canada Pension Plan and Employment Insurance. Because the tax rates are generally similar the CPP and EI plus Canadian income tax is usually more than the US income tax would be. I have only seen two cases where tax was due on the US return after taking credit for taxes paid to Canada. One was about $50 and was caused by the sale of a condo in Canada. The other was caused by sale of a house in Canada by a retiree. The taxpayer used charitable contributions to wipe out Canadian tax on the sale. On her US return she was only allowed half as much for her charitable contributions so there was a large tax owing.

If you are liable for US taxes, to regularize your situation the IRS wants to see 6 years of returns, including those for financial accounts if the total comes over 10,000 in any one year.

Please remember that the US government has a long memory for taxes owing. There have been a couple of cases in recent years where someone who was living in Canada decided to visit the US in the mistaken belief that the US government had forgotten an old criminal charge. In both cases the visitor was sent to answer a murder charge from more than 25 years before. It would be foolish to believe that they would forget something that would result in taxes being paid.

If you are in this situation I can prepare the forms for you. I will need the Canadian returns and the information on your financial accounts. Often preparing the pages about financial matters is more work than preparing the tax forms.