U.S. Expatriates – Are you a US Expat or Green Card Holder living in Canada? Then be aware that you must file U.S. income tax returns (1040) every year, including previously missed ones and declare your worldwide income. The United States Treasury and IRS are very serious about U.S. taxpayers income tax filing responsibilities and their worldwide financial information reporting obligations. As a United States Citizen or Green Card holder you have legal obligations to declare revenues regardless of where the gain was earned or received or where you live.
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- Please contact me for personalized pricing and free initial discussion. There will be no surprises. Once we quote you a fee, it will remain unchanged, provided that the information you gave us initially does not change significantly. The following is a list of potential undeclared new income tax circumstances which might result in changes to our initial quotation:
- Additional state tax filing requirements
- Foreign (non-U.S.) investments
- Non-U.S. banks or other financial accounts
- U.S and non-U.S. real estate rental.
- Self-employment
- Business partnerships and trusts
- Corporations
Non-United States individuals visiting the U.S. or investors in U.S. real estate market can also find themselves subject to the U.S. income tax laws. CRA and IRS are in close contact. Because residents of Canada must report their worldwide income to the Canada Revenue Agency, US citizens residing in Canada are exposed to heavy compliance requirements in order to keep up with filings in both countries and declaring worldwide income from all sources.
U.S. persons must file personal income tax returns (1040) every year. Entire universal income from employment, investment (interest, dividends and capital gains, etc…) must be reported. US income tax rules are generally different from Canadian rules and determining which income to declare on either country’s tax returns, transferring credits, avoiding double taxation, and taking advantage of applicable treaty provisions can be tedious and complex. Most U.S.A citizens living in Canada and earning Canada-source income will end up paying no additional taxes to IRS, provided that their U.S. and Canadian returns are completed and filed correctly.
Foreign Earned Income Exclusion
The amount Foreign Earned Income Exclusion (FEIE) changes every year. For 2014 tax year the exclusion is equal to $99,200 USD of earned income from employment or active business outside the U.S. Passive income including interest, dividends and capital gains do not qualify for FEIE exclusion.
The Foreign Earned Income Exclusion is only available to taxpayers who meet the “bona fide foreign resident” (BFFR) test or the “physical presence test” (PPT). To qualify as a BFFR in Canada, an individual taxpayer would most often have to file a Canadian tax return as a resident of Canada throughout the whole year. There are exceptional provisions for those who move to or from the US in a year. To qualify for physical presence test the individual must spend at least 330 days in a twelve-month period outside the United States. Some exceptions apply.
To claim the FEIE the taxpayer must have his or her “tax home” outside the United States the entire year for those who apply under bona fide foreign resident or BFFR test, and for the 330 day period under the physical presence test or PPT.
Foreign Tax Credits (FTCs)
Where annual earned (active) income is greater than the FEIE exclusion amount or passive income is received, claiming Foreign Tax Credits or FTCs is critical to making sure that double taxation is not imposed on eligible income . In principle, any taxes paid to a foreign country who has signed a tax treaty with United States on income earned in that country will generate a non-refundable credit in the US, canceling out the U.S. tax otherwise computed on that item of income to the extent of FTCs paid. Since Canadian personal tax rates are, for the vast majority of Canadian Tax payers, higher than U.S. rates, claiming FTC on taxes paid in Canada, will more or less always make sure that American tax payers living in Canada with no US-source income pay zero US income tax.
Those Canadian residents who have US-source income, must declare that income and therefore pay taxes to CRA. This Canadian tax generates Foreign Tax Credit to be used on their U.S. 1040 return and help will offset the US tax, so there is no double taxation either way. However, there are many complex tax regulations which depending the source, timing and nature of income can affect the amount credit one can claim..
Exceptional Circumstances: Tax situations can get even more complicated when one type of income is taxable in the U.S. while that same income is not being taxed say in Canada. For example, any amount of gains from sale of principal residence is tax free in Canada . But, IRS, allows each tax payer only $250,000 exemption on capital gains resulting from sale principal residence, and the rest is taxed at long term capital gain .
Example: if Sara single and living in Canada and a US citizen, sells her home and has $1000,000 USD capital gain, she may have to pay tax on the $750,00.00 excess gain without receiving any credits on her Canadian return. For couples maximum exemption is $500,000.00
Canada allows the exclusion of capital gains on main residence only if Sara has owned the home and lived in it for at least two years in the past five year period. There are always exceptions to this rule, for instance if someone has to move because of changes in work or business location .
RRSP
The Registered Retirement Savings Plan (RRSP) program is a tax deferral Canadian retirement program. RRSP contributions in a given year are deductible from earned income (provided that the taxpayer has enough unused room). Interest and capital gains earned inside the RRSP account are not included in the taxpayer’s income until retirement or early withdrawal . Any amounts withdrawn prior to retirement including principal and growth will be added to the individual’s same year income and become taxable
US considers assets inside an RRSP account as foreign grantor trusts, and the income is taxable to the owner in the year earned. U.S. persons with RRSP accounts, are required to address the RRSP issue in their 1040 returns.
The Canada-US Tax Treaty provisions provide some relief in this situation. Article XVIII(7), allows U.S. taxpayers elect to defer tax on the earnings inside an RRSP account in their U.S. income tax return(s). Form 8891 must be completed to claim Treaty benefits. RRSP holdings must also be reported under FBAR requirement.
RRSP contributions cannot be deducted from income for U.S. tax purposes and therefore reducing U.S. taxable income using same procedures used on a Canadian return. But, higher income tax rates imposed in Canada will result in adequate foreign tax credits to compensate for the US taxes.
The Foreign Account Tax Compliance Act or FATCA and FBAR
FATCA was passed in March 2010. The Canada Revenue Agency (CRA) in coordination with IRS, will begin collecting information on U.S. person’s financial accounts in Canada worth more than $50,000, starting at the beginning of 2016. U.S. persons will continue to have to file three years of back taxes and six years of foreign bank account reports. New U.S. tax rules, including a new tax on investment to pay for Obamacare and no tax break on capital gains.
Previously, the only option available to individuals who were behind on their U.S. tax filing requirements was to report under the Offshore Voluntary Disclosure Program which is aimed at people who hide cash in offshore tax havens to avoid the IRS. It imposes punitive penalties on all non-reported assets. The IRS also announced that it would be increasing the penalty on foreign assets to 50 per cent from 27.5 per cent on all unreported assets.
The deadline to report FBAR or Foreign Bank and Financial Accounts is June 30. All non-U.S. accounts with a maximum equivalent value of U.S. $10,000 or more must be reported.
Penalties for those expats failing to report properly are very harsh. For those who honestly did not know about the new filing rules and made a mistake out of ignorance, the fine is $10,000 per error. But those found to be purposely avoiding IRS, fines can be as high as 50 per cent of what’s in their accounts, or $100,000.
The new U.S. legislation coming into effect this July 1 will make it harder for non-US account holders to hide their accounts. Under the Foreign Account Tax Compliance Act (FACTA), foreign financial institutions will have to report accounts held by Americans to U.S. authorities.
As for the new Obamacare tax compliance- if you meet either the physical presence test or Bona Fide presence test, then you’re deemed in compliance and you don’t have to worry about the individual mandate for health insurance coverage.
The IRS is to putting pressure on foreign financial institutions, and governments, to disclose any assets hold by Americans including bank and brokerage accounts, partnerships, mutual funds stocks and so on.
The problem with this approach is that it effects everybody, including the many Americans who have lived in other countries for years and don’t even owe the IRS any taxes after putting into consideration exemptions, foreign tax credits and higher-tax rates in places such as Canada.
The upcoming Canadian budget bill, includes measures to implement provisions of the FATCA in Canada and is expected to become law before Parliament breaks for this summer. The law will authorize CRA to collect relevant account information and remit it to the IRS.
Gambling
Casinos and other payers generally withheld 25% tax from certain kinds of gambling winnings. Winnings of more than $5,000 from the following sources are subject to income tax withholding:
– Sweepstakes; wagering pool, winners of poker tournaments; or lottery.
– Any other bet if the earnings are at least 300 times the amount of the gamble.
Winnings can paid in cash, property, or as an annuity. Winnings not paid in cash are valued as their fair market value (FMV). Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. However, the taxpayer may need to provide the payer with a Social Security number to avoid withholding. If the taxpayer receives gambling winnings not subject to withholding, he or she may need to pay estimated tax.
Payers who withhold income tax from a taxpayer’s gambling winnings, should issue a Form W-2G or 1042-S (for non-resident aliens) showing the amount of winning and the amount of tax withheld. The winner then must report the form in his or her 2015 1040 or 1040NR. If a person has any kind of gambling winnings and fails to provide the payer his or her Social Security number, the payer may have to withhold 28% income tax. This rule also applies to winnings of at least $1,200 from bingo or slot machines or $1,500 from keno, and to certain other gambling winnings of at least $600.
Only taxpayers that itemize their deductions can claim their wagering losses.
Accurate record keeping of gambling winnings and losses is very important. IRS may ask to see supporting documents such as receipts, tickets, statements or other records to substantiate the amount of both winnings and losses.