This article is for all U.S. citizens living in Canada, especially those who are trying to bury their heads in the sand about filing their required U.S. tax returns. It may also be of special interest to conspiracy theorists.
The American tax system taxes on citizenship, not on residency, like the rest of the developed world. This means if U.S. citizens move to Canada -- even if that was 30 years ago -- or when Canadians are born to U.S. citizens in Canada, they have an ongoing obligation to file a U.S. tax return. (The benefits of U.S. citizenship.)
This does not mean paying tax to the United States. In most cases, the credit for tax paid in Canada eliminates tax that might have been owing to the United States. It is more of an annoyance and a cost in professional fees.
Once the Canadian return has been prepared, most of those figures are transposed directly to a U.S. return, with some expert adjustments required. The return is then filed with the Internal Revenue Service (IRS), accompanied by a small cheque, or a request for refund.
Many of our U.S.-citizen clients have received refunds, primarily due to the U.S. initiative to stimulate their economy in 2009 by giving cash to every U.S. taxpayer, no matter where they live.
Equally important is filing with the U.S. Department of the Treasury form TD F 90-22.1 -- Report on Foreign Bank and Financial Accounts (popularly known as the FBAR) -- disclosing all investment and bank accounts and their maximum balance in the calendar year.
The fines for failing to file this return start at $10,000, and can be $100,000 per account plus a jail term, if it is determined a U.S. citizen was willfully withholding information on foreign bank or investment accounts.
Clearly, this is aimed at Americans living in the United States who are hiding money offshore. Unfortunately, the rules apply equally to U.S. citizens living in Canada, who naturally have "foreign" accounts.
This just in: There is a new form starting this year (8938) that applies to Canadian-resident U.S. citizens whose "specified foreign assets" exceed $300,000 US during the year, or $200,000 US at year-end.
I can hear many readers now saying things like, 'They have no right to do this' or 'This is an outrageous abuse of process' or 'They'll never catch me anyway' or 'They'll back down.'
The first two statements may be completely correct, but the others, I fear, are not.
-- The U.S. Customs and Border Protection Service and the IRS continue to expand their computer connections. They will soon be asking the question, 'Have you filed your tax return?' to visiting U.S. citizens.
-- Starting Jan. 1, 2014, Canadian financial institutions are going to be asking you if you are a U.S. citizen or green card holder. Under the HIRE Act, the institution will be required to file reports with the IRS if they intend to do business with any U.S. persons. If you refuse to answer, this will be reported, and 30 per cent tax can be withheld on any U.S.-source income.
FATCA (the Foreign Account Tax Compliance Act) enforcing this is going ahead as planned. Five countries have signed on.
Canada has not yet, but our financial institutions will still need to comply if they hope to keep doing business in the United States.
On a brighter note, house prices have stabilized in many parts of the U.S., and even started rising in Arizona. More on that in the coming weeks.
"ô "ô "ô
Recently, we reminded snowbirds of their potential U.S. filing obligation each June 15, and the need to add up the number of days in the United States for the previous three years to determine if they have a "substantial presence" and, if so, to then establish a "closer connection" to Canada than the United States with IRS form 8840, to avoid filing U.S. tax returns.
Just to be clear, this applies to Canadian citizens who are winter vacationers in the United States, including the vast majority who have never worked in the U.S. and do not earn any money there.
On all of these issues, you can get more details on the Free Press website, or on my blog at www.davidchristianson.com. However, if any of this applies to you, please get professional advice from a specialist. The potential consequences of non-compliance are too large to ignore.
Speaking of Canadians working in America, I think it will be the L.A. Kings in five or six games.
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a Portfolio Manager (Restricted).