5 Tax Tips for US Citizens with Canadian Foreign Accounts

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A tax crackdown by the IRS has been particularly difficult for Americans living in Canada.  Under the law, all American citizens must declare all their income from every source worldwide.  Under the US Foreign Accounts Tax Compliance Act, starting from 2013, the IRS will require all financial institutions outside the US to give information on all accounts held by Americans and green card holders.  To comply with the Act, Canadian financial institutions will likely have to file years of tax returns and detailed annual account disclosures.  Click here to read or watch more IRS Help resources.

Although Canada is not a tax haven, it is subjected to the same tax compliance laws as some other countries renowned for being such havens like Switzerland.  “Unfortunately, U.S. tax law does little to distinguish between US citizens living on sandy beaches in Caribbean tax havens and those living in a relatively high-tax country like Canada,” said Warren Dueck, a certified public accountant and chartered accountant with W.L. Dueck & Co. in Richmond, B.C.  Jim Flaherty bemoaned the fact that the Act will place a heavy burden on Canadian financial institutions.

The IRS has been holding a voluntary disclosure program aimed at encouraging all holders of foreign bank accounts to step forward and declare their assets in exchange for a limited punishment and waiver of criminal prosecution.  This applies to all US citizens, green card holders and residents.  Under the Offshore Voluntary Disclosure Initiative, which ends on August 31, penalties are reduced to a range of zero to 25% of the balance of all non-US financial accounts and assets in 2010.

Here are 5 tips for US residents, citizens and green card holders living in Canada.

1. Determine whether you are subject to tax.  If you are a US citizen, dual Canadian and US citizen, resident or green card holder then you are required to file US federal income tax.
2. If you own less than $10,000 in all your accounts in total, you are still liable to tax but will only be generally subjected to tax penalties if you have not been paying your taxes.  You should file your returns and keep them current.  Note that foreign accounts are not only limited to bank accounts.  It also includes savings and checking accounts, life insurance policies, investments, securities, RRSPs, RESPs, TFSAs, insurance and annuity policies with a cash surrender value, commodity futures or options account, shares in a mutual fund, etc.
3. But if you own more than $10,000 in all your accounts at any one time, you should file a Report on Foreign Bank and Financial Accounts (FBAR) and the US Treasury’s Form TD F 90-22.1.
4. If you own 10% or more of a Canadian business entity, you must declare this.  Failure to do so would result in a penalty of $10,000 for each year and each entity.
5. If you pay taxes in Canada, it does not offset your tax obligations to the US.  Determine what your US tax liability is and decide whether to join the Voluntary Disclosure Program.

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