By now, most U.S. citizens living in Canada will have filed their 2012 U.S. tax returns. Right?
You will recall from many of our previous articles that U.S. citizens living anywhere in the world are required to file U.S. tax returns. A great source of information is IRS Publication 54 -- Tax Guide for U.S. Citizens and Resident Aliens Abroad.
In most cases, filing will not result in any tax owing, thanks to the credit for taxes you paid in Canada and the $96,000 foreign-earned income exclusion.
However, there are some possible exceptions for people who have TFSA (tax-free savings accounts) or RESP (registered education savings plan) in Canada.
The IRS does not recognize these as tax shelters or tax-deferral plans, as we do in Canada. (The IRS does recognize the RRSP, provided the tax preparer files the appropriate form.)
So, for example, a TFSA that generates $1,000 of interest income is exempt from income tax on the Canadian tax return, but will add $1,000 of income to the U.S. return. This can result in taxes, though likely less than would have been paid in Canada on the same income earned outside the plan.
The real cost comes in the extra forms that need to be filed for TFSAs. Although not yet issuing an official ruling, the IRS appears to be considering TFSAs as "foreign grantor trusts" requiring you to file IRS form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner) each year, and an additional form 3520 transaction report in any year money is contributed or withdrawn from the plan.
All of this is also required for any RESP that has a U.S. citizen as the subscriber.
The deadline for filing U.S. tax returns and, accompanying forms, is April 15. But non-residents of the U.S. are granted an automatic extension to June 15, and can apply for a further extension. The FBAR (Report of Foreign Bank in Financial Accounts) is due at Treasury each June 30.
Actually, the only good news is the next round of bad news for U.S. taxpayers and Canadian financial institutions was delayed from 2012 to 2014. Jan. 1 is the intended effective date of FATCA -- the Foreign Account Tax Compliance Act that will compel all Canadian banks and financial institutions to report to the IRS the presence of any accounts held by U.S. citizens at their institutions.
Yes, you heard that right. Whenever you open a new account or make changes to an existing account, institutions will be asking if you (or anyone else involved in the account) are a "U.S. person," which means U.S. citizens, U.S. green-card holder or snowbird with a "substantial presence" each year in the U.S.
If the answer is no, then no further action is taken. If the answer is yes, the institution will disclose the account holder name to the IRS, and a 30 per cent tax withholding will be imposed on any "U.S. withholdable payments" made to the account.
If the total of all accounts with the institution is less than $50,000, the institution has the discretion to not disclose the information, but may still include it in its filing. Anyone refusing to answer will be classified as a "recalcitrant account holder" and be on the list that is sent south.
Both U.S. filing requirements and this new regime are onerous, expensive and other adjectives I cannot use in the newspaper. Unfortunately, the IRS and the U.S. Border Service are getting better at talking to each other and may soon start asking U.S. citizens about their tax-filing status as they cross the border. The IRS is extending its reach and has elicited support from many former tax-haven countries in its effort to capture tax invaders.
If the IRS finds you first, they can require you to file all missing returns, deny the foreign tax credit that prevents you from paying your taxes twice, and then apply interest and penalties to your unpaid taxes. It doesn't seem worth the risk.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.