Wondering whether or not US citizens living in Canada need to file US taxes? Well, as an American citizen – someone living and working in Canada, you will have to file US taxes. But that’s just the tip of the iceberg! That’s why; we at Expat Global Tax have pieced together this information, to help you with the basics of US tax filing in Canada.
US taxes are weird and the American government has made it mandatory for its citizens to file US taxes irrespective of where they live and work. So, if you are living in Canada, you may well be a tax resident of Canada and even have to pay taxes in Canada. But, in spite of this, you will still need to file US taxes.
According to the IRS, US expats in Canada must report their foreign assets to the IRS every year. This declaration includes any and all investments, bank accounts, and some specific assets. Why you ask? Well, the IRS claims that this is a small effort on their part to keep US citizens from hiding money in other countries. That said, US tax filing in Canada doesn’t mean you will end up paying taxes, as this is purely for informational purposes.
To put it simply, US citizens and Green Card holders are obliged to file United States income tax returns, regardless of where they stay. Of course, there’s some relief for low-income groups, but we will discuss that later or you may directly connect with us for info on that. As for the report, it must include your worldwide income, no matter where you earn it from.
That said, there are some other filing requirements, that you may be liable to do if and when you meet certain conditions. Expat Global Tax is a one-stop solution for all things pertaining to filing US tax return from Canada. Our tax experts will guide you through filing the Foreign Bank Account Report a.k.a. FBAR, and FinCEN. Some of the other filings that we help you through include the likes of Form 5471, Form 3520, and Form 8938. All these are just meant for information, and do not lead to any assessment or payment of tax.
US expats living abroad automatically get two-month filing extension through June 15th – something they don’t need to apply for. In fact, you can apply for a further extension up to October 15, however, the application must be done before June 15th. There’s provision for an additional two-month discretionary extension, which extends the filing date to December 15.
However, these extensions only extend the time period for filing the taxes, and not to pay taxes due. Being a professional Canada US tax accountant, we almost always have to remind our clients that they actually begin accruing interest on and from April 15. Worried about the penalty? Don’t be! The late-paying penalty doesn’t kick in if the taxes are not paid by June 15. It only comes into effect when the tax return isn’t filed after all the extensions.
The foreign tax credit has been the outcome of the US-Canada treaty, and is devised to make sure that US expats don’t get taxed twice on the same income. How does this work? Well, Canadian residents earning income in the country and paying Canadian taxes get to offset US taxes due. This happens through the foreign tax credit.
Canadian taxes are usually higher than US taxes and thus, in most cases, US expats residing in Canada are often left with no US tax obligations from the income they generate in Canada.
Another great information for US expats looking to file taxes for US citizens living in Canada is that if people pay more in taxes, the excess foreign taxes can be carried forward for up to ten years, as a future credit! Isn’t that great?
But wait, there’s more! You can even use the US foreign earned income exclusion or even the Foreign Housing Allowance Act. Residents of Toronto and Vancouver benefit from this exclusion as housing costs are considerably high in these cities.
For those who do not know, the Totalization Agreement between the US and Canada came into effect back in 1984. It helps taxpayers avoid paying double social security tax on their income when they are self-employed. It offers an exemption for US expats covered under the Canadian Pension Plan. However, US expats will have to report their self-employed income in their annual tax filing.
Here’s something for the high-earning individuals living in Canada. All high-earning US expats residing in Canada – making money from passive sources, are subject to the US NIIT or the Net Income Investment Tax. It is a flat 3.8% tax that IRS assesses on passive income of individuals. This includes people who earn more than $200,000. The same threshold is set at $250,000 for married couples filing jointly. And yes, this applies even to passive income from Canadian sources.
Over the years, working as a US and Canada tax accountant, we keep coming across American expats who are shocked by this tax. The reason being – the Canadian income tax you pay on the passive income can’t be used to offset the Net Income Investment Tax. This is what makes US expat taxes so confusing. This is again why you need expert help from a reliable tax expert for your American citizen living in Canada taxes.
At Expat Global Tax, we often come across US expats who plan on spending their golden years in Canada. But before taking the big decision, here are a few things that you must consider.
Notable Canadian tax-free investments, such as the Registered Education Savings Plan (RESP) and Tax-Free Savings Account (TFSA) aren’t tax-free under US tax law. So, the IRS considers income from these as taxable and the accounts are treated as foreign trusts. Hence, you may have to pay additional taxes on these investments.
Moreover, since US levies taxes on worldwide income, it tends to include Canadian retirement and pension income as well. Of course the Canada-US treaty brings in some relief, but such income must be reported to the IRS, else it can lead to penalties.
As per the Canadian law, selling one’s personal residence is exempt from the country’s capital gains tax. This exemption is a big boon for people – especially in cities like Toronto and Vancouver. In such places, property value almost doubles every 5-7 years.
However, only $250,000 of the capital gain, i.e. exempted from capital gains tax under the US law. The same threshold is set at $500,000 for married couples filing jointly. The excess beyond the exemption is taxed at rates up to 23%.
To reap the benefits of the exemption, US expats must have lived in the home for two or more years in the five years prior to the sale of the property. Being a professional Canada US tax accountant, we ask every husband and wife to become co-owners of the primary residence. This reduces the extreme taxation.
Here another disappointment for US expats! RRSP and RRIF contributions sure lower the taxable income in Canada, but not as per the IRS in the US. Therefore, American expats are taxed from the plan, though the same is levied only on the interest and not on the principal amount.
Dealing with US taxes while living in Canada can be quite daunting, but that’s where we come in! At Expat Global Tax, we’ve been helping American expats – individuals and entrepreneurs alike – navigate the complexities of US tax compliance.
Need to file US taxes from Canada? We make the process smooth and hassle-free. In here, we understand the nuances of cross-border taxation. So, by teaming up with us, you not only remain compliant in US and Canada, but also end up maximizing your benefits. As your trusted Canada US tax accountant, we guide you on tax treaties, FATCA, FBAR, and other reporting requirements. Team up with Expat Global Tax and never worry about missing a deadline or paying more than you should.
Whether you’re new to expat taxes or need help streamlining your filings, help is just a call away. Reach out today and let’s get started!
For your Get Free Quote on any tax related matters, please contact us via the phone number or email listed below or request a call back using the forum.
