Tag Archives: Canada-US tax treaty

Residency

Yesterday I prepared a Canadian tax return for a student who had been in Canada since August of 2013. He had no income for 2013 or 2014. He was filing for those years to declare his tuition and other allowable school expenses to carry forward in case he decided to work in Canada for a while before returning to China. We prepared the return as if he was a Canadian resident, but had to warn him that he might not be considered as a Canadian resident because he had no ties in Canada. The Canada Revenue Agency might take the position that he was only in Canada on a temporary basis and disallow his claim.

This is often a problem. If you are moving from one country to another they will usually accept it if family members are moving with you but are very unlikely to accept it if you are just working
somewhere else but returning home frequently. Residency is very important on the Canadian side of a cross-border return. It is less important on returns for US persons.

One other thing is that a few years ago New York state tried to tax non-residents who were telecommuting to New York jobs. I have prepared returns in other years for a person who lived in Niagara Falls, Ontario but worked in the US. He had a corporation which I believe was registered in Canada. This required another form on his US return.

The critical point of all of these residency problems is that most government bodies are pressed for revenue so they want to collect as much as they can from people who they might consider to be residents. The concept is that they want to collect revenue from these people but do not want to pay to provide services to them.

Tax Season is Here

Today I interviewed by phone for a tax preparation job in Vancouver. It was with an accounting company. I do not know if they will offer me a job or not. The job was preparing T1 returns. They did not seem to be interested in my experience preparing 1040s.

US taxes are much more complex than Canadian taxes. This is because individual US legislators can add complexities to the tax code. This is usually done to provide a benefit to either a campaign contributor or a constituent. In Canada only the Finance Minister can add a complication.

The US taxes their citizens no matter where in the world they live. The only other country that does this is Eritrea. The US provides a system of deductions for earned income in other countries.

I have only ever seen 2 US citizens living in Canada who had to pay US tax after figuring their Canadian taxes. This is because they can treat their Canada Pension Plan and Employment Insurance as taxes. The only ones who have to pay are usually only in this category because they have made a capital gain that is taxable at a higher rate in the US.

If you want a price quotation give me an idea of the type and number of information slips. If you have financial accounts outside the US and the maximum value of these accounts is more than 10,000 I need to know how many of these accounts you have.

If you want to send me your job to do, do not send originals. Send only copies. Better yet, instead of sending me copies, use your printer-scanner to make images, then send me the images attached to an email. This simplifies the whole process.

I will prepare the returns and send them back to you as PDF files so that you can print them out, sign them and send them in. I can efile Canadian returns now. I hope to be able to efile US returns in late March but it is not possible to determine when the IRS will give me permission. It is to their advantage to have forms efiled because it means that they do not have to input them manually. I should note here that the Canada Revenue Agency charges tax preparation firms $25 per return for handling paper returns unless the firm prepares only a small number of returns.

It is very important to determine if your financial accounts outside the US add up to 10,000 or more. For this purpose take the maximum value that each account had during the year. Often if you take out a loan the loan amount appears in your checking or savings account for only a few minutes but this still counts for determining the limit.

If the total of the maximum value of each account comes over 10,000 then you need to include every financial account that you have signing authority for, even tiny ones like your gardening club, your kid’s Boy Scout troop, or anything like that.

Please send your tax questions

Please send me your tax questions. This time of year I am advertising my tax preparation services.

I do both Canadian and US tax returns, and of course I do returns for taxpayers who have to file in both countries. There is a tax treaty that determines which country gets to tax which income. This is important in cases where a person gets income from both countries in any one year, or when a US citizen is working or living in Canada.

If you want a price quotation give me an idea of the type and number of information slips. If you have financial accounts outside the US and the maximum value of these accounts is more than 10,000 I need to know how many of these accounts you have.

If you want to send me your job to do, do not send originals. Send only copies. Better yet, instead of sending me copies, use your printer-scanner to make images, then send me the images attached to an email. This simplifies the whole process.

I will prepare the returns and send them back to you as PDF files so that you can print them out, sign them and send them in. I can efile Canadian returns now. I hope to be able to efile US returns in late March but it is not possible to determine when the IRS will give me permission. It is to their advantage to have forms efiled because it means that they do not have to input them manually.

Getting ready for tax year 2015

I specialize in cross-border income taxes. There are believed to be about a million US citizens living in Canada and about the same number of Canadian citizens living in the US.

US citizens or green card holders need to file no matter where in the world they live unless their income is below the minimum. This minimum changes from year to year and depends on your age and family status. I should have the 2015 numbers sometime in January.

Canada only requires people to file for the part of the year that they are in Canada, and also for property, such as real estate, that they own when they are outside the country. When I was working for another agency the head man told me that the agency got Canadians the year that they moved to the US and again the year that they moved back to Canada. In those years they had to file in both countries. The returns work better if the two are prepared at the same time by the same person.

Since one or two years ago the IRS has taken the position that if you were legally married to anyone anywhere you are still married even if you live in a state that does not recognize gay marriage unless you have been divorced somewhere that accepts gay divorce. Canada is more open about it. They have accepted gay marriage and common-law marriage for many years. They have only accepted gay divorce since 2005. The agency head I mentioned above and I were talking to a gay client and the agency head told him that gay divorce was the next logical step to take. The first gay divorce was granted about a month later in Nanaimo, BC. Two lesbian women got married in 2003, separated in 2004, and divorced in 2005.

I have been informed that the software that I use for US taxes will be ready on January 14. It will allow me to get information from clients’ stock trading accounts and then place this information in their tax returns directly. Of course this will only be possible if the client decides to provide me with the necessary authorization.

It will still be necessary to look at the information very closely. Many small companies amalgamate with other companies, do consolidations, and change names frequently. These are often difficult to follow. This has been a very difficult year financially for small mining companies so I will have to be extra careful with these. Today I read that a company that was named after Isis, the Egyptian goddess, has had to change their name.

I will be able to efile Canadian tax returns as soon as the software for these returns is available, probably near January 14. My authorization for efile for US tax returns will not come until later in the year, probably near the end of March. Until then I will have to either send paper copies or pdf files of these returns to the client.

There are advantages of efiling returns. First of all, instead of sending paper returns and then having someone at Canada Revenue Agency or the IRS enter them into a program to produce a computer file, we simply send the computer file that we have produced. This decreases the problems caused by data entry errors. It also speeds up the process.

US citizens who live in Canada should not take out Tax Free Savings Accounts. The IRS considers these to be trusts and there is a big form involved. In one case they instructed me to take out an Employer Identification Number for a TFSA. This was for a $2000 bank account in Calgary. I could not imagine it having employees anywhere, especially not in the US, but this is what they asked for so it was what I provided. After making this application I told the client that it looked like we had been providing training for some new IRS employees.

It will still be necessary to file information on foreign financial accounts twice, to different branches of the IRS. I do not know why they want this information twice but we are stuck doing what they ask. The second set, which was due the end of June for many years, is now due at the same time as the main form 1040.

This is necessary if the maximum value of foreign accounts at any time in the year is USD 10,000 or more. This includes not only your own accounts, but any accounts for which you have signing authority, be they for a Boy Scout troop, a service club, a garden club or your child’s college fund. If money for something like a property purchase goes through your savings account and out again the same day this is counted as part of the $10,000.

Of course I would be happy to prepare your returns for you. If you want to send paper copies (I specifically mean copies, not originals) please write to me at dave@daves-income-tax-online.com to make sure that you have my correct address before sending them. If you are using your multi-functional printer to make the copies you can simply email me the images that your scanner makes so that I can print them out at my end instead of sending them through the mail or using a messenger service.

Recently I read that last tax season a USPS employee noticed that he or she was delivering hundreds of tax refund checks to one address. The IRS was notified. They had sent millions of dollars of phony refunds to the same address. I have no idea why their computers did not notice this, but as you should be aware an ordinary computer cannot do anything that its programmers did not include in its instructions.

The exception to this rule is Watson, the computer that beat human experts at playing Jeopardy. I have been granted access to Watson and will try to use it to predict the stock market. If I make a million dollars on the stock market using Watson’s predictions I will get out of the income tax preparation business and go into the business of decreasing my own income taxes.

That makes it pretty clear that I intend to stay in the income tax preparation business for a long time to come.

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.

Ready for Tax Year 2014

I finally finished preparations for Tax Year 2014. I took the 2-hour ethics course, the 10-hour tax theory course, and the 6-hour update course. I passed the exams for these courses as well. Today I spent a frustrating time renewing my IRS license, otherwise known as a PTIN or tax preparer identification number. This number has been required for the past couple of years for anyone who prepares US income taxes and charges for this preparation. As nearly as I can tell their intention was that if they find a fraudulent tax return they can easily zero in on the preparer who was involved and check a few more of the returns that he or she prepared to see if the fraud was confined to the return that they found fraudulent entries in or if the preparer was really in the business of preparing fraudulent returns. Last year a postie notified the IRS that he had delivered dozens of refund checks to one address and had dozens more to deliver there. They stopped payment on all of them. The person who wrote this up said that it was not clear why the IRS had not noticed this themselves.

Two years ago the IRS also required preparers to obtain credit for a tax course. Someone fought them in court over it and the final result was that it was declared that it was not necessary. This year they have announced that anyone who takes and passes the courses, similar to those I described above, will be listed in a directory that they will publish in January. It seems that since they can´t force preparers to take the courses they will bribe them with free advertising. I took these courses partly to get the free advertising and partly because I wanted to get up to date before tax season starts.

A lot of the course work was devoted to the Affordable Care Act, also known as Obamacare. It is unbelievably complex. If you are having your taxes prepared anywhere please remember to get all of the information from your employer or from your insurance exchange or both. It is frustrating to have to send a taxpayer back to get more information. It means that the preparer will have to start all over again. In many cases the client will not be willing to pay for this extra time spent on his or her return. This will lead to friction and bad feelings all around.

It is difficult to see how anyone believed that adding 51 insurance exchanges and lots of new complex regulations could possibly reduce overall costs. In my blog on the subject I pointed out 5 or 6 things that could have been done to reduce medical costs. As nearly as I can see none of them have even been attempted.

Above I referred to a problem renewing my PTIN. What happened was someone in the IRS did not bother to check that the renewal page would work with both of the most common browsers. I was left facing a screen that wanted three entries but would not tell me what was to be entered in these spaces.

Anyway I will be available to help with US or Canadian taxes this year. My specialty is taxpayers who have to file in both countries. These are typically people who have moved across the border in either direction in 2014 or US citizens who live in Canada.

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.