Qualifying U.S. taxpayers, residing within or outside the U.S. (cross-border U.S. citizens), are required to pay their taxes and file their U.S. tax return by the U.S. tax deadline of April 17, 2018 (Tax Day 2018). U.S. citizens or resident alien taxpayers residing overseas, or in the military on duty outside the U.S. are allowed an automatic 2-month extension to file their U.S. income tax return, i.e. until June 15 of every year.
This extension, however, does not remove the liability of any penalties and interest that may apply on any unpaid taxes for the two-month period.
Failure to file U.S. returns could result in large civil as well as criminal penalties even if the U.S. taxpayer does not owe taxes to the U.S. Therefore, U.S. taxpayers residing in Canada and other foreign countries should highly consider getting in touch with a cross-border tax practitioner to help them file tax returns that save them not only from double taxation but also help keep them tax compliant.
Here are a few points that U.S. citizens residing in Canada and other foreign countries should keep in mind while filing their U.S. income tax return.
2017 U.S. Tax Filing for Cross-Border Americans
Forms in addition to U.S. Tax Return
In addition to filing U.S. individual income tax returns (Form 1040), qualifying taxpayers need to also comply with certain additional tax information forms, such as:
FinCEN Foreign Bank Account Reporting (FBAR) Form114
The FinCEN FBAR Form 114 should be filed by all U.S. taxpayers, who have authority over or a financial interest in non-U.S./Foreign financial accounts that exceed a balance of $10,000 at any time during the year. Foreign financial accounts include bank accounts of any type; such as: RRSPs, TFSAs, and securities accounts. For 2018, the FBAR filing date is April 17, 2018. An extension of 6-months to October 15 is automatically granted to all taxpayers. The FBAR is filed electronically through FinCEN’s BSA E-Filing System. However, it is not filed with a federal income tax return.
Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner
Form 3520 and Form 3520-A are required to be filed by those U.S. taxpayers, who own a foreign trust or are a beneficiary of a foreign trust. Canadian RESP (Registered Education Savings Plan) and TFSA (Tax-Free Savings Account) may qualify as foreign trusts, and may have to be reported. This information return should have been filed by March 15 and can be extended to September 15.
Form 8938, Statement of Foreign Financial Assets
Qualifying U.S. taxpayers with specified foreign financial assets that exceed certain threshold limits during a tax year need to file Form 8938. In addition to foreign financial accounts, these assets include stocks, financial instruments or interests in other foreign entities that are not held in foreign accounts. Form 8938 should be filed by April 15 (including extensions) of every year along with the income tax return. (Learn more about the filing limits for Form 8938).
Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
U.S. persons with interest in a passive foreign investments (PFIC) need to file Form 8621. Passive investments include foreign-based mutual funds, money market accounts, pension funds, partnerships and other pooled investment vehicles. Form 8621 forms part of the tax return.
Form 5471, Interest in Foreign (Canadian) Corporation
As a U.S. person residing in Canada with ownership rights in a foreign (Canadian) corporation, you may be required to file the Form 5471. This report is one of the most complex information returns. Furthermore, new U.S. laws, part of the 2018 U.S. tax reforms, may require payment of a one-time “transition” tax. Consulting a cross border tax professional is recommended.
Form 8865, Interest in Foreign Partnership
This form is filed along with the U.S. individual annual income tax return by a U.S. person who has interest or ownership in a Canadian or other foreign partnership. Each partner needs to file a separate Form 8865.
Filing these forms is not easy, and subject to penalties in case of errors. It is best practice to reach out to a cross border tax professional, who can help you be fully compliant with the U.S. tax formalities.
Past Years Tax Compliance
Many U.S. persons residing in a foreign country are not aware of their U.S. tax filing requirements. Due to FATCA, and other regulations, the IRS is able to obtain information of U.S. taxpayers’ foreign accounts through foreign financial institutions and tax authority. This makes it all the more critical for U.S. citizens residing in Canada or other foreign countries to report their foreign income and assets to the United States.
U.S. citizens, who were unaware of their U.S. tax-filing requirement, can use the Streamlined Filing Program. While, the OVDP program is available for U.S. persons, who willingly avoided filing their U.S. tax return or reporting their foreign (non-U.S.) assets.
Note that, if you wish to apply for U.S. tax compliance under the OVDP program, do so at your earliest. U.S. persons have only this year to avail the OVDP program, as the IRS has discontinued the program from September 28, 2018 onward.
Furthermore, foreigners, including Canadians, may also need to comply with the U.S. taxes. Some Canadians may be considered residents of the U.S. with as little as 31 days of presence in the United States if they fulfill the U.S. substantial presence test. Canadian taxpayers can claim relief under the closer connection exemption or the Canada-U.S. Tax Treaty. Certain forms need to be filed to claim this relief as well.
Incorrect tax filing or inaccurate reporting of assets and incomes can result in severe penalties and interest. In some cases, the punishment may even include criminal charges. Therefore, to avoid double taxation and future tax complications, you should always rely on a US-Canada cross border tax specialist to assist you with the most beneficial way of complying with U.S. and Canada taxes.
AG TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.