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I am a U.S. citizen or a Green Card holder, how will US tax affect me?
U.S. citizens and Green Card holders are required to file a U.S. tax return every year regardless of where they live and may be required to file a U.S. Estate return in the year of death. If you were born in the U.S. you are considered a citizen. Unlike most countries, the U.S. taxes their citizens even if they have no earned income in the U.S. There are exclusions and credits available such that you are unlikely to incur additional taxes. However, several situations exist where you may end up being subject to double tax. Thus, it is very important to understand what it means to be a ‘dual-filer’ so you can make informed decisions. If you choose to ignore this requirement, you run the risk of being penalized for not filing, questioned at the border when trying to enter the U.S., or your estate may be required to back-file tax returns upon your death. If you have not filed a return in a number of years, a voluntary disclosure can be made where the U.S. tax authorities will generally accept filing the last six years of returns only. There are also certain information returns required to be filed by U.S. citizens who have more than $10,000 in Canadian investments and bank accounts or who have more than a 10% ownership in a Canadian company. These information returns have strict deadlines and significant penalties.
I am a owner of private or publicly traded U.S. shares or a U.S. property, will I have to pay US tax?
Among other potential filing requirements in Canada and the U.S., the above assets are considered U.S. Situs assets and are subject to U.S. estate tax upon death. In the U.S., estate taxes are based on the fair value of assets as opposed to in Canada where only gains are taxed. This can lead to unexpected taxes. Although there is a minimum asset value before any taxation occurs, it is very important to be aware of these rules, and when possible, do some tax planning in advance.
I spend the winter in the U.S. But I don’t earn any money so why would I owe tax?
In the U.S., taxes are imposed not only on citizens but also on residents. The residency rules differ from the Canadian rules. A rule called the Substantial Presence Test uses the number of days an individual has spent in the preceding three years to determine whether that individual would be considered a U.S. resident and be subject to U.S. tax. If you spend every winter in the U.S., you may meet this test. To avoid unnecessary adverse tax implications, a statement should be filed where you can declare a closer connection to Canada.
I work in the U.S. But my Canadian employer pays me so why does US Tax matter?
Generally, your employment income will be subject to tax in whatever country your ‘feet’ are in when the income was earned. Thus, if you work 25 days in the U.S., and 75 days in Canada in a given year, then 25% of your employment income for that year is ‘U.S. sourced’ and should be reported to the U.S. taxation authorities. Generally, due to the Canada-U.S. tax treaty, this will not result in additional taxes to the individual. However, failure to report employment income in the U.S. could lead to non-filing penalties and potentially deny your entry to the U.S. on your next work assignment. Employers also run a risk of payroll tax and penalties in the U.S.
Please contact your local MNP advisor or a member of our US Compliance Team if you have any questions about US Tax.
United States IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS in Circular 230, please note that, unless otherwise expressly stated in this communication any U.S. tax advice given in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purposes of (i) avoiding penalties that may be imposed under United States federal, state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter.
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