Personal Tax Return Preparation for US Citizens living in Canada
Here is some information on U.S. filing requirements for citizens living abroad; it is not extensive but covers most of the situations for U.S. citizens living in Canada:
- U.S. tax is based on citizenship and requires all U.S. citizens to file a tax return declaring worldwide income regardless of where they live. (Form 1040)
- U.S. citizens with a financial interest in non-U.S. financial accounts, with an aggregate value exceeding $10,000 at anytime during the year, must report specific financial account information to the U.S. Department of Treasury. (Report of Foreign Bank and Financial Accounts Form TDF 90-22.1)
- U.S. citizens holding non-U.S. investments with an aggregate value exceeding $200,000 at the end of a year or $300,000 at any time during the year, are required to report information about those assets as part of their tax return. (Form 8938)
- Canadian mutual funds and similar investments are considered to be “passive foreign investment corporations” for U.S. tax purposes. U.S. citizens are subject to complex tax rules on these investments if they are held outside of an RRSP or RRIF. You want to be sure your investment advisor is familiar with these rules to avoid adverse tax consequences. (Form 8621)
- Any earnings on investments held in an RRSP or RRIF by a U.S. citizen during the year are subject to U.S. income tax, unless a request for deferral is made and filed with their tax return annually. (Form 8891)
- The U.S. considers an RESP to be a foreign trust; therefore U.S. citizens are subject to reporting requirements for foreign trusts (Form 3520). In addition, the earnings in the RESP are subject to double taxation as any income or capital gains realized in the RESP are taxable in the U.S. and when a child withdraws the funds from the RESP, they are also taxable in Canada.
- Unlike in Canada, where income or capital gains realized on investments held in a Tax-Free Savings Account are tax-free, any income or capital gains realized within a Tax-Free Savings Account held by a U.S. citizen is taxable in the U.S. Tax-Free Savings Accounts may also be deemed as foreign trusts and subject to reporting requirements for foreign trusts.
- U.S. citizens who are officers, directors or shareholders with more than 10% ownership in non-U.S. corporations have additional reporting requirements regarding the corporation that has to be reported with their personal tax return. (Form 5471)
- The penalties for failure to file vary by form. They are based on a percentage of assets for some forms, a minimum of $10,000 for others, and up to $10,000 for others. Depending on the form, the penalty may be applicable for each outstanding year.
Please note being a Canadian citizen or filing Canadian income tax returns does not eliminate the requirement to meet U.S. tax reporting and disclosure obligations for a U.S. citizen. It is recommended that U.S. citizens who have not kept current, or who have not filed previously, file returns for the last six years.
Following are links to additional information:
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