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Top Tax Tips for Americans Living in Canada

12/10/2015


Are you among the million or so Canadian residents who are also Americans? If so, you probably have American income tax filing and compliance requirements that require immediate attention. Here are our top 7 tax tips for Americans living north of the border:

1. Know your obligations. It’s important for U.S. citizens and green card holders who are resident in Canada to be aware of your obligations because the IRS has made it clear that it will impose steep penalties for non-compliance.

2. Understand what you have to pay taxes on. No matter where they live, American citizens are subject to U.S. taxes. They are required to pay U.S. tax on their worldwide incomes — not just income earned in the United States. The U.S. also has gift and estate taxes, which Canada does not.

3. Use your exclusion. A “foreign-earned income exclusion” exempts up to US$95,100 of Canadian-source employment and business income. After applying this exclusion and foreign tax credits, most Americans residing in Canada will not pay additional U.S. income tax.

4. Beware of complications. Having a Canadian entity like a corporation or trust can create complications:

  • Investment income earned inside it may be included in your U.S. personal taxable income, even if the income is not distributed to you. Even if the income is distributed, U.S. tax may be higher than Canadian tax.
  • When you (and other Americans together) own only a minority of an investment company, income distributed out of it can be subject to onerous taxation — conceivably more than 100% of the distribution.
  • Income earned by a trust can, in some cases, be attributed back to the person who funded the trust. Alternatively, distributions received by you from a trust could be subject to tax similar to that for an investment company.
  • If you sell your incorporated dental practice, Canada often allows an effective tax exemption of up to C$813,600 of the gain. Unlike a Canadian, however, you would be subject to U.S. tax on the entire gain, usually at a rate between 15 and 20 percent.

5.  Be aware of gift and estate taxes. Should you die, your estate will be subject to a tax of 40% of its value over US$5.43 million. U.S. gift tax is integrated with estate tax, so lifetime transfers count against the same threshold. Once that threshold is passed, gift and estate taxes apply at the 40% rate. Many common corporate reorganizations (such as integrating a PC into a trust for your children), which create no tax in Canada, can create U.S. income or gift tax. 

6. Reporting foreign assets. If you have accounts in Canada (or anywhere else outside the United States) totaling US$10,000 or more during the year, for example, you must file an annual Report of Foreign Bank and Financial Account (FBAR) listing every foreign account in which you have a financial interest or signature authority. There are other supplementary forms you have to file with the IRS to report your interest in Canadian corporations, partnerships, trusts, and other investments.

7. Do your planning early. If you or your spouse is an American, it’s important to carefully plan these types of transactions. The earlier you begin the better you can structure your affairs to minimize taxes and stay compliant.

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