QUESTION: I have a dual citizenship and have been living in Canada for the past three years. I am now working in Canada. Do I have to file taxes in the US as well? If so how do I go about doing that?
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david ingram replies:
US citizens must file US INCOME TAX RETURNS on their WORLD income no matter where they live AND NO MATTER WHERE THE MONEY IS PAID FROM.
Goto www.centa.com and read the 29 pages on US/Canada Taxation in the second box down on the right hand side. There is nothing new here - it was written in 1972 and updated several times up to this version which was last touched in January 2001.
You can download the forms at www.irs.gov or you can hire someone like our firm to do it for you.
This old Oct 1995 Newsletter (top left hand box at www.centa.com) pretty well explains it all. I have updated a couple of places that needed it.
david ingram & Associates
Vancouver Tax Expert, Real Estate & Immigration Advice
British Columbia, Canada
Call us from anywhere at 1-604-980-0321
October 1995
the CEN-TA PEDE
david ingram's US/Canadian Newsletter
U.S. CITIZEN and GREEN (resident alien) CARD HOLDER TAX FILING and FOREIGN ACCOUNT REPORTING REQUIREMENTS
I want to make it clear that what you are about to read applies to Americans who have never lived in the United States, as well as those who have emigrated from the U.S. to other countries (including CANADA).
Even if they have no U.S. income now, and they have never had one cent of U.S. income in their lives, United States citizens are required to file a United States income tax return (reporting their world income) no matter where they live in the world if they have income from any source. There are severe penalties for failing to file an annual U.S. return. The attached assessment on page 127 shows $190,000 tax and penalties levied against a U.S. citizen living in Vancouver, and shows that the IRS can go back to 1986 (or even 1967) with impunity. In this case, the gentleman has lived in Canada since 1986, and was told by professionals that he did not have to file United States returns. The attached notice dated January 23, 1995 was the first correspondence that he received from the IRS since 1986. The IRS found him after he lost his U.S. passport in a robbery and had to get it renewed.
This $194,000 bill is for stock market trades. The person actually lost money. For those years he did not file U.S. tax returns, the IRS has taxed him on the GROSS sales without allowing any costs for the stock. The IRS knew of some $500,000 US of income from these sales and assessed accordingly. Unfortunately, because he did not report the sales, and the tax returns are technically statute barred (for refunds), and because he has thrown away all that old paperwork, my client has no legal method of forcing the IRS to amend the returns to allow the costs. We have spent countless hours trying to reconstruct the figures. For instance, we wrote to Merrill Lynch 3 times and did not receive the courtesy of a single reply. Phone calls were really useless. Fortunately, the IRS has agreed to look at my reconstruction, and we are hopeful that the bill will be cancelled.
And, in case you are thinking this is a wealthy man who will just have to "pay up", the person involved has averaged less than $15,000 Canadian per year of earnings from employment for the years 1986 to 1995. This bill could wipe him out for life, and HE LOST MONEY. A Canadian professional accountant told him explicitly that he did not have to file U.S. tax returns because he had lost money and he was living in Canada. It is true that MOST Canadians do not have to file Canadian returns if they move to the U.S., or Australia, or Germany, etc. BUT! ALL AMERICANS do have to keep filing no matter where they live.
If you ARE a U.S. citizen, and have not been filing your U.S. returns, you should get a copy of my November, 1993 CEN-TAPEDE and use the information in that newsletter to file your returns retroactively to 1987 without penalty.
What else does an American in Canada (or Paris for that matter) have to worry about?
1. Taxation of the Family Residence
Americans come to Canada and are amazed that the family home in Canada is income tax free. Unfortunately for the American, the sale of a Canadian (or Australian, etc.) family house is still reportable by the American on their annual 1040 income tax return. However, $250,000 of profit per person is exempt from US taxation if the US taxpayer has lived in the house for 24 months out of the past 60 months (2 out of 5 years) If there is a bonefide rason for early sale such as a death, divorce, job transfer
2. Gift Tax (if this applies to you, read my February 1994 newsletter)
After selling the family house (which they think is tax free) it is not unusual for an American living in Canada to give their children some of the proceeds and buy a less expensive house or condo for themselves. A U.S. citizen can only give a child up to $10,000 a year before incurring U.S. gift tax. The February, 94 newsletter has all the rates, but suffice it to say that if U.S. mom gives her daughter $20,000 U.S. in one year, MOM OWES gift tax of $1,800 and has to file a U.S. 709 gift tax return.
You might ask, "How will the IRS find out?" Easy! The daughter will go across the U.S. border with her new car, and a customs/IRS agent will ask her where she got the money to buy the car. Or daughter will buy a Hawaii condo with the money and when she is audited on the sale and asked "where did the money come from to buy the condo?" she will have to answer that "Mom gave it to her."
This situation took place in my office the week I wrote this. I spent 21 hours over a 3 day period in a tax audit with a young couple, the tax department auditor, and a 1 1/2 year old tyke. The auditor spent 4 hours asking how much they spent for beer, diapers, clothing, rent, gas, travel, and Xmas gifts, etc., IN DETAIL back as far as 1986 for some items. The auditor was doing a "source and application of funds" audit and was particularly concerned with how much money the husband's father had given them, and just as importantly, when? After thirty-one years in the tax business, I still could not figure out whether the auditor was after the 35 year old "kids," or whether the auditor was after the father. I am inclined to think the auditor was after "dad."
The auditor also mentioned the "close" cooperation which now exists between customs, tax, and immigration. She can get whatever she wants from any of the departments and we are seeing this ourselves almost daily. In addition, the U.S. and Canadian tax authorities are now proactive in their reporting. If a Canadian auditor is dealing with someone with an American identity or income (rental, stock, director's fees, etc.) the Canadian auditor MUST now automatically report it to the U.S. and vice versa because of the U.S. / CANADA Tax Treaty signed on November 8, 1995. (This treaty is the planned subject for the December 1995 CEN-TAPEDE newsletter).
3. Ownership of Foreign Companies (Also see September 94 newsletter)
If a U.S. citizen owns 5% or more of a foreign corporation, he or she has to file some rather rigorous forms with their 1040 tax return. Basically, Form 5471 requires them to recalculate the company's profits using a Dec 31 year end, and put their resulting share of profits (even if not received) on their 1040 return. Penalties for failure to file this form can add up at (are you ready for this?) $10,000 every 30 days late up to a maximum of $50,000. This can be even more significant if you own 4 Canadian companies. The hard part here is for the American to realize that his Canadian Company is a foreign company to the U.S.
4. Taxation of "Tax Free" Dividends
This is always a heart breaking moment. A Canadian accountant has spent hours explaining to "hubby" why his wife should have "X" number of shares in his company and how beneficial it is because she can take out $23,753.60 of actual dividends and not have to pay any tax to Canada because of Canada's dividend tax credit. They are totally dismayed and the accountant mortified to find out that the dividends were 100% taxable on her U.S. return, and that the U.S. does not recognize the Canadian dividend tax credit. In addition, she is also liable to file the 5471 forms mentioned in "3" above or suffer the penalties.
5. Reporting of Foreign (Canadian) Accounts.
U.S. citizens with signing authority on foreign financial accounts which total more than $10,000 U.S. at any one time in a year must report the details of ALL the accounts to the U.S. Treasury in Detroit on a form TDF-90 as on page 124. Failure to file this "simple little form" carries a penalty of up to $500,000 PLUS 5 years in jail. Note that this form is filed with TREASURY in Detroit, NOT WITH the IRS. And I was informed by an IRS Agent duriong a June 20, 2007 Conference Call that the new mimimum penalty for failure to file will be $10,000 . I have had a 105 year old client who received a $10,000 fine and an associate had a68 year old woman client with a $60,000 fine. Over 1,000 clients of Jerome Schneider, a Vancouver consultant are also being fined as part ofhis ple bargain wherein he agreed to turn his clients in. see more info at
http://www.centa.com/CEN-TAPEDE/archive/Week-of-Mon-20051010/002095.html
Notice that this TDF-90 form requires details of accounts on which you have a signing authority. It does not need to be your account, or contain your money or securities. If you are a nurse and sign on the nurse's union account, you must report the details asked for on the form TDF-90 enclosed with this newsletter. If you are a cub leader, or a signing officer for your Kinsmen account, or a deacon at your church and sign the church's account, you must give the details to the Department of the Treasury in Detroit. This also applies to RRSP accounts which are even more serious because they are also classified as "FOREIGN TRUSTS". You must also report an account owned by an organization that you could be a signing officer for if 'you' chose to be. i.e. you are the president or someother officer who can walk into the bank, state you are the president of such and such, and automatically be added to the list. Find a fillable Form T D F 90-22.1 at http://www.irs.gov/pub/irs-pdf/f90221.pdf
6. Annual Taxation of RRSP Accounts
NOTE that ANY U.S. CITIZEN who is the owner of a CANADIAN RRSP (which is a foreign trust under U.S. law) is liable for a fine of up to $500,000 U.S. PLUS 5 years in jail if they do not report the existence of the account to the Treasury Department as explained in item "5".
In addition, there are further penalties for failing to report the RRSP earnings on an annual basis to the IRS. There is no form provided so I have made my own which I have included on page 126 as an example. On an annual basis, you must report the following to the IRS: Since this was written , the IRS has come out with form 8891, a much simpler form to fill out. Find a fillable form 8891 at: http://www.irs.gov/pub/irs-pdf/f8891.pdf
1. The name of the financial institution holding the RRSP;
2. The total contributions made up to Dec 31, 1994 including rollovers;
3. The earnings (interest, dividends, capital gains) in 1995; and
4. The balance in the account as of (at) Dec 31, 1995. (OR ANY OTHER YEAR)
Note that the internal earnings of the RRSP MUST be reported on the U.S. 1040 income tax return. The RRSP earnings can only be exempted AFTER reporting them under the US/Canada Tax Treaty.
7. Social Security Tax on Canadian Self Employed Earnings
If you are earning money in Canada, you are liable to pay U.S. FICA taxes of 15.3% on those earnings UNLESS you file an exemption request under Article XVIII(5) under the U.S. / CANADA Tax Treaty or Article V of the CANADA / U.S. Social Security Agreement. Page 128 shows an example of a $19,000 retroactive bill for 1988 and 1989 when an American couple living in Canada did not make the elections.
8. All Canadian Wages or Self Employed Income is Taxable in the U.S.
There is an "up to $70,000" U.S. exemption but to get the exemption, you HAVE to file the return and submit a form 2555 to claim the exemption. If you do not fill in the exemption form, your Canadian earnings are taxable on a U.S. return and you could end up with double taxation if you do not come forward voluntarily. Note that the $70,000 exemption is up to $82,400 in 2006.
Murray Morrison
Morrison & Co. Law Corporation is an established Law Firm located in Surrey, in the Greater Vancouver area of British Columbia, Canada
Specialist in Bankruptcy
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On November 2, 2007, David Ingram wrote:
It is very unlikely that blind or unexpected email to me will be answered. I receive anywhere from 100 to 700 unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients. Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject and get answered first. I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when I am out of town. e bankruptcy expert US Canada Canadian American Mexican Income Tax help
However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. As an example, as I write this on Oct 18, 2007 since June 16th (124 days), my 'spammed out' box has 34,939 unread messages, my deleted box has 11854 I have actually looked at and deleted and I answerd 1078 email questions for clients and strangers. I have also put aside 622 messages that I am maybe going to try and answer because they look interesting. -e bankruptcy expert US Canada Canadian American Mexican Income Tax help
Therefore, if an email is not answered in 24 to 36 hours, it is lost in space. You can try and resend it but if important AND YOU TRULY WANT OR NEED AN ANSWER, you will have to phone to make an appointment. Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321. expert US Canada Canadian American Mexican Income Tax help.
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David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
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This is not intended to be definitive but in general I am quoting $900 to $2,900 for a dual country tax return.
$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,100 would be the same with one rental
$1,300 would be the same with one business no rental
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits no move in or out
$1,700 would be for two people with income from two countries
$2,900 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up.
With a Rental for $400
A Business for $400 - Rental and business likely $550 to $700
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales) are likely $50.00 for the first and $20.00 each after that.
Catch - up returns for the US where we use the Canadian return as a guide will be $150 to $500.00 depending upon numbers of bank accounts, RRSP's, existence of rental houses, etc.
Just a guideline not etched in stone.
This from "ask an income trusts tax and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems for the United States, Canada, Mexico, Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida, Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax Immigration Wizard Antarctica Rwanda Guru Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer expatriate anti money laundering money seasoning FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income Tax Convention. Advice on bankruptcy e bankruptcy expert US Canada Canadian American Mexican Income Tax help.
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