Home > Tax Law, US Citizens in Canada > Tax Obligations of U.S. Citizens Living in Canada

Tax Obligations of U.S. Citizens Living in Canada

It is the eve of April and Canadians are looking forward to warmer weather but, at the same time, feeling less than enthusiastic at the prospect of fulfilling their seasonal fiscal duty; that is preparing and filing their annual tax returns before the April 30th deadline. Similarly, American citizens, U.S. residents and U.S. green card holders also view April as “tax-season” and their deadline to file their tax returns with the IRS is April 15.

Contrary to the Canadian tax system which is based on residency, the United States tax system is based on one’s citizenship as well as residence.  Under the U.S. tax laws all U.S. Citizens regardless of their place of residence, U.S. residents or green card holders, have a statutory obligation to file their tax returns in the United States.

Filing Deadlines

U.S. citizens, U.S. residents and U.S. green card holders must report all of their worldwide income from all sources no later than April 15th of the year following the taxation year.  U.S. persons living outside the United States must also comply with the filing requirements but are granted an automatic two-month extension. Therefore, a U.S. citizen living in Canada must file his or her U.S. tax return by June 15th.  

All U.S. citizens living in Canada must file their U.S. tax returns every year regardless of whether any taxes are due.  Even if a U.S. person owes no tax in the United States, he or she should file a return, if only to preserve all available tax credits. 

Failing to maintain filings may trigger unfortunate issues such as denying renewal of that person’s passport or delaying entry to the United States until that person’s tax record is updated.

RRSPs, RIFFs & Penalties

RRSPs and RIIFs are an area where there is a clear difference between the Canadian and U.S. reporting requirements.

Under U.S. tax law a U.S. citizen or resident owning a Canadian RRSP or RRIF must report any income and gain earned within his or her RRSP or RRIF on a yearly basis; not when the income is withdrawn as is the case under Canadian tax laws.  To avoid double-taxation the Canada-U.S. Tax Treaty allows for an election in the U.S. citizen’s tax return to defer recognition of the income earned and gains until such income or gain is withdrawn from the subject RRSP or RRIF.

However, to take advantage of that election the U.S. person must file his or her tax return on time and failure to do so may result in losing the right to make that and other similarly important elections. 

Estate and Gift Tax

Upon death, the United States levies a tax on the fair market value of the world-wide property of a U.S. citizen, U.S. residents or non-resident aliens if they own property in the United States. Consequently, any U.S. citizen living in Canada will be subject to the U.S. estate tax and ought to consider such in their estate planning (Canadians should consider the estate tax before acquiring U.S. property).  There is a basic exemption available to U.S. citizens that may result in the estate being exempt from the estate tax but the prudent approach is always to seek professional advice on the subject.

One can see that, aside from the issue of estate tax, dealing with a deceased U.S. person’s taxes upon their death can be a nightmare for estate trustees if the deceased failed to file his or her U.S. tax returns in previous years. This will inevitably result in an onerous estate administration for the estate trustee and may have disastrous results for the beneficiaries. Also, an omission of the estate trustees to consider the U.S. estate tax and failure to ensure the deceased’s tax record is in order may result in the estate trustee being personally liable for any taxes owed. 

To avoid such dire consequences on death, U.S. persons must maintain orderly and up to date tax files.

The HIRE Act

In light of the UBS banking scandal in the United States, Congress passed the Hiring Incentives to Restore Employment Act (HIRE).  HIRE requires foreign banks and other financial institutions to report all U.S. persons’ bank and financial accounts to the IRS. HIRE also provides that foreign entities such as corporations, partnerships and trusts must report U.S. persons’ ownership or beneficial interests. 

HIRE appears to provide overreaching powers to the IRS since it essentially implements a system that “forces” the foreign financial institution or entity to submit to the IRS’s jurisdiction. However, Canadian financial institutions and other entities will likely comply with HIRE and report U.S. persons’ bank and financial accounts to the IRS. This may complicate the U.S. persons’ income tax filing requirements since their information will have to mirror the data submitted by the Canadian institutions or entities.

Although the impact of the HIRE exceeds the scope of this newsletter, those involved in Canada-U.S. dealings and taxes must be informed.

Relinquishing U.S. Citizenship

Considering all of the onerous reporting obligations, the idea of simply relinquishing one’s U.S. citizenship may seem tempting. However, to no one’s surprise, the U.S. government has created onerous rules aimed at dissuading the relinquishment of U.S. citizenship for tax purposes.

To successfully relinquish your U.S. citizenship, one must first comply with all requirements of the U.S. State Department as well as completing and filing all required forms with the IRS; notably Form 8854 and ensure all tax returns are up to date. 

Also, it is likely the U.S. person will be deemed to have disposed of all their worldwide assets at fair market value and incur taxes on the deemed disposition; something to consider before starting the process.

It is also possible that taxes may still be owed after one relinquishes his or her U.S. citizenship.  Those rules are complex and ought to be discussed with a tax professional.   

The expatriate tax will also apply if the relinquishing person is present in the U.S. for more than 30 days in any calendar year during the 10 years following the date that person relinquished his or her citizenship. Note that the expatriate tax only applies if it is greater than the amount of tax that would otherwise be imposed if you were taxed as a non-resident alien.

As one can clearly see, although tempting, relinquishing one’s U.S. citizenship may not be worth the trouble involved.

Conclusion

U.S. tax filing obligations are often misunderstood or simply ignored by U.S. citizens living in Canada.  Ignoring or delaying the filing requirements places one at tremendous risk. The consequences of being held liable for failure to file a tax return in the U.S. will result in additional taxes, penalties and interest to be paid as well as other unforeseeable consequences.

If you are a U.S. citizen living in Canada, we highly recommend you seek professional tax advice as to your U.S. tax duties and obligations and make every effort required to meet all deadlines for filings.

Sébastien Desmarais
Lawyer
Tierney Stauffer LLP

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

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  1. Bob Boase
    June 5, 2011 at 5:15 pm | #1

    Can you cite a case where the person refused to comply with filing IRS tax returns. What degree/level of cooperation if any did the IRS receive from the CRA to collect taxes from the US citizen living in Canada who has been meeting his tax obligation to the CRA for forty years?

    • June 6, 2011 at 6:56 pm | #2

      Article XXVIA of the Canada-US Tax Treaty specifically deals with the cooperation of each state in the collection of taxes together with interest, penalties and costs. There is also a subsection of the Treaty that deals with how the Agency (IRS or CRA) will “adapt” in order to collect the tax liability of a taxpayer resident in the other jurisdiction.
      Sébastien Desmarais

  2. EAnn
    June 17, 2011 at 9:14 pm | #3

    We are U.S. citizens who have drafted wills in the state of IL, and are living in Canada (perhaps long-term). We are not yet permanent residents but have work permits. Do we need to draft new wills? Thanks for any advice!

    • July 14, 2011 at 3:05 pm | #4

      I always advise having a valid Last Will and Testament in the jurisdiction you currently reside. The fact that you are U.S. citizen will require a proper estate planning where cross-border tax issues must be addressed (notably U.S. estate tax).
      Sébastien Desmarais

  3. Lindsay
    July 19, 2011 at 5:18 pm | #5

    My wife was born in the US to her Canadian mother and American father. Moved to Canada at age of 1 and lived entire life (48 years) in Canada. Still has a US passport. From what I’ve read she should have been filing US tax forms all this time? Her income has always been below the exclusion cutoff – but she does hold RRSPs in her name in Canada.

    How do we fix this?

  4. Russell Jones
    August 22, 2011 at 1:50 pm | #6

    Have you ever heard of anyone being asked to file by the IRS who is a living in Canada? I have never heard of anyone even being asked.

  5. Ned
    August 23, 2011 at 2:10 am | #7

    I just found out about this and I’m very scared. The deadline to meet the voluntary filing is in 9 days (Aug 31) and according to the article in the Vancouver Sun (the story is no longer available online) I could be fined over $300k. This is a nightmare. I don’t think I could meet the filing deadline if I tried and besides I think that only lessens the penalty.

    I’ve never lived in the States, never earned money in the States and never worked in the States. However, I have citizenship through my mom who has been in Canada for over 40 years.

    Am I still obligated and/or required to file taxes and disclose all bank accounts? And if I file voluntarily for the past 6 years, will I automatically get fined? If I don’t do anything are the chances high that the IRS will seek me out?

    It seems the intent of this law (http://www.irs.gov/newsroom/article/0,,id=235695,00.html), and the punitive measures that come with it, are intended to thwart tax evasion, not punish people who owe no money and didn’t know their tax obligations.

    I’m so grateful for any information you could offer.

    • August 23, 2011 at 12:21 pm | #8

      Hi Ned.
      I spoke with Sebastien regarding your comment. As you can expect he is overwhelmed by the response to the blog and issue and is unable to respond to each comment. He has asked me to pass the following comment to you and other readers of the blog.
      Richard Quigley
      Marketing Director

      Hi Ned,
      As a US citizen, you indeed have to file tax returns in the USA. The OVDI is ending at the end of the month but you could seek an extension. Also, you have other options available to you to rectify the situation. I highly recommend you discuss your situation with tax professionals.
      SD

  6. Tanya
    August 23, 2011 at 2:18 pm | #9

    Russel – I do know of someone now in BC who was contacted by the IRS and told he has 17 years of back taxes to file. This was the first they had heard about it as well… So, it looks like they truly are beginning to enforce it.

  7. August 26, 2011 at 3:27 am | #10

    In a similar boat here. Wife was born in Chicago but lived the rest of her life in Canada, now we find this out and that we may be facing a massive fine, and there doesn’t seem to be a damned thing we can do about it…

    • August 26, 2011 at 5:30 pm | #11

      Hi Tony
      As a US citizen, your wife may have other options available to her to rectify the situation. I highly recommend you discuss your situation with tax professionals. The deadline to file an extension under OVDI is August 31/11.

  8. August 26, 2011 at 7:00 pm | #12

    Thanks; We actually have an appointment with an accountant in a couple hours, and will be looking into getting an extension.

  9. Liana
    October 19, 2011 at 3:26 am | #13

    I have american citizenship through my mom, but I have never lived in the united states. As I got my citizenship when I was a minor, I did not get a SSN at the time and still do not have one. Do I still have to file income tax in the United States if I don’t have a SSN?

    • Tanya
      November 2, 2011 at 2:45 pm | #14

      The same is true for my son who was adopted from the US. He was never given a SSN and has never lived there. He’s also four and has no income. :) For now, I’ve left it alone…

  10. Risa
    October 20, 2011 at 9:54 pm | #15

    Never knew about the obligation to file annually. I have lived outside the US since 1976, firstly in the UK, now in Canada since 1989. I am also a Canadian citizen, pay my taxes, use my US passport to enter the US and have never had anything regarding tax returns mentioned to me. I was unaware of the August 31 deadline and out of the country in Sept and October. This has put me in a state of panic and I would like to rectify this as soon as possible. I have already contacted my CA and hope he can help me.

  11. Russell
  12. March 27, 2012 at 6:35 am | #17

    It was a good experience reading your post. It helped me learn a lot about IRS . thanks for sharing.Good post !!!

  1. March 29, 2011 at 6:44 pm | #1

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