Monthly Archives: February 2015

Cross-border Taxation

There are many potential problems in cross-border taxation. I will refer mainly to people who have to file in both Canada and the US. Typical examples are US citizens who live and work in Canada and anyone who has moved across the border in either direction during the year.

Canada taxes on worldwide income for residents and Canadian income for non-residents. Taxpayers who enter or leave Canada during the year file a return for the part of the year they were resident.
The US taxes people on the basis of citizenship. This is done by only one other country. Sometimes this other country is stated as being North Korea and sometimes it is stated as Eritrea depending on who you listen to. In either case the US is not in good company.

I prepared US and Canadian taxes together for many US citizens who lived in Canada. In only two cases was there any tax due on the US return. People who have jobs or are self-employed in Canada are allowed to deduct Canadian income tax, unemployment insurance, and Canada Pension Plan from US income tax. The sum of these three is nearly always greater than the US income tax would be so it is only a matter of reporting to the IRS, not paying them as well. Almost The only times when additional tax is due is when someone has sold something relatively large and made a capital gain. There are also differences in limits on charitable deductions, and these are often much more restrictive in the US than in Canada.

Going the other way, Social Security and Medicare taxes are added to US and state (and sometimes local) income taxes when figuring credits on Canadian taxes and the sum of these is usually greater than the Canadian income tax would be. Because of these additional charges usually there is no tax obligation in the second country, even if there is a filing obligation.

Often the most work involved in preparing US taxes for a US person who lives in Canada is the banking statements. These are mandatory and they are getting stickier about them every year. At present you must add up the maximum amount during the year in each account and if it comes over $10,000 you have to list all financial accounts that you have signing authority over, including your child’s boy scout troop, your garden club, your AA group etc. These all go onto two different forms. The reason for having to file what is essentially the same information on two different forms is that different groups within the IRS are interested in different aspects of these financial accounts. If this makes sense to you what are you smoking?

Because of all of these factors if you know that you have a cross-border filing requirement check into all of your financial accounts before you go to have your taxes prepared. If you don’t you will likely be sent home to get more data. This will usually result in an extra charge for the preparation because it is a lot more work to prepare a return if you have to do it in two separate sessions. It takes time to get into a return and remember everything that is in it. Even if there is no extra charge it will cause bad feelings all around.

A few years ago I prepared a form for a US citizen living in Canada who had left a large sum of money with an investment adviser in Washington state. He charged her hefty management fees as you might expect. I had to call him about something related to the account. It soon became clear to me that he had no understanding of the fact that because she was living in Canada and in fact had 10 rental properties in Canada that he should have been thinking about exchange rates. He had not even thought about them. The accounts that she had with him showed a moderate income in US dollars but a huge loss in Canadian dollars. IMHO he should have paid some attention to the way exchange rates move so that he would be able to maximize the gain in Canadian dollars but he seemed to be quite incapable of understanding the concept.

I am currently in Guadalajara, Mexico and expect to go to Vancouver, Canada, sometime in March. If you want me to prepare your taxes the easiest thing is to email them to me. If you do so and you have to file US taxes please make sure that you include all of the information about financial accounts.

Odd effects of Obamacare

The IRS reports that tax filings are running at or slightly above their usual level for this part of year. (This is being written in mid-February.) This is amazing because the Obamacare complications add a lot of little kinks to the calculations. As I pointed out in a previous post the theory that adding millions of people to the insured category could somehow decrease costs is ridiculous. To increase revenues it was necessary to add about a dozen little tax hikes.

Perhaps the worst tax of all is that many companies are limiting hiring to keep the number of employees down below the cutoff point where they have to provide health insurance. Millions of people are working part-time because their employers want to make sure that they do not get involved. For some reason that is not clear to me there is a cutoff which defines full-time work as 30 hours a week instead of the traditional 40. This has led to millions of people working a maximum of 29 hours in a week.

In general US filers who live outside the US are not required to have medical insurance. Those who are eligible for government insurance in Canada pay about $650 a year unless they live in Ontario, in which case medical insurance is paid by a tax on employers. The same applies in one of the maritime provinces, I can’t remember which one. Where it is free like this about 105% of the population are covered, which obviously includes people who do not live in the province.

Those who have government insurance in Mexico pay about $200 a year unless they are over 60, in which case it is double that figure.