Overview
The United States taxes its citizens and residents on their worldwide income, regardless of residency. An individual may not owe taxes, but filing a tax return is mandatory. This is to claim benefit of deductions and to comply with foreign reporting requirements. The U.S. tax process is complicated and expensive, and severe tax penalties apply in case of non-compliance.
Upcoming Articles
The following is an overview of our upcoming article series outlining the general problems that U.S. citizens face complying with the IRS and fulfilling U.S. compliance formalities while living abroad:
Article I. Foreign Bank and Financial Account Reporting (FBAR -Form 114)
U.S. citizens or residents have to file the FBAR if they have authority over or financial interest in financial accounts outside the U.S., exceeding $10,000. Previously, the due date was June 30 each year without the ability for extension. But, beginning of 2016 the deadline was changed to April 15 with extension. Foreign financial accounts include bank accounts of any type; RRSP’s, TFSA’s, securities accounts, and any other type of financial account.
Article II. Statement of Foreign Financial Assets (Form 8938)
In addition to filing FBAR reports, U.S. citizens or residents who have foreign financial assets exceeding $50,000 ($100,000 joint) at the end of the year or $100,000 ($200,000 joint) at any time during the year must file Form 8938. Specified assets include any foreign financial accounts as well as stocks, financial instruments or interests in other foreign entities not held in foreign accounts. The filing threshold for taxpayers living outside the United States is $200,000 on December 31 ($400,000 if joint) or $300,000 at any time during the year ($600,000) if joint.
Article III. Interest in Foreign Canadian Corporation (Form 5471)
U.S. owners or beneficiaries of a corporation or partnership with more than 10% of the shares in a foreign corporation must determine if they are required to file IRS Form 5471. Form 5471 filing is required under four circumstances based on percentage of ownership and transactions within the corporation.
Article IV. Interest in Foreign Partnerships (Form 8865)
If a U.S. person or a member of their family holds 50% or more interest in a foreign partnership, they need to file Form 8865.
Article V. Interest in Foreign Trust (Form 3520)
U.S. persons treated as owners of any part of the assets of a foreign trust need to file Form 3520. Interest in Canadian mutual funds which distribute funds annually (public funds) and RRSPs are not required to file.
Article VI. Interest in Mutual Funds (Form 8621)
Form 8621 is one of the most complex reporting requirements for U.S. citizens or residents holding interest in Canadian mutual funds. Reporting rules require an annual analysis of the current year distributions from the mutual fund to determine if there is any excess distribution. These rules apply to each mutual fund separately. This could result in a U.S. person being subject to additional excess distribution tax as well as an imputed interest rate applied to this tax.
Failure to file these forms may result in large penalties. An average taxpayer residing in a foreign country is usually not aware of how to comply with the U.S. tax regulation.
Understanding The Tax Process of Two Different Countries
Each country has its own set of compliance laws and planning tax strategies. Existing tax treaties do not prove of much help, as all compliance points are not always covered. For example, capital gains are taxed differently in the U.S. and in Canada. Exemptions available in Canada, may not be available in the United States.
Possibility of Double Taxation
As mentioned above, although tax treaties exist some compliance points are bound to go wrong. That could leave a possibility of double taxation. Foreign tax credits provide relief. But, if the tax rate in a particular country is lower than in the U.S., there may still be a U.S. tax liability. For example, if the tax liability in the resident country is $500 while in the U.S. the person’s tax liability on the same income is $1,000, a Foreign Tax Credit will provide relief up to the $500 paid in the individual’s resident country. This leaves a remaining U.S. tax liability of $500, payable to the IRS.
Possibility of Losing U.S. Passport for Tax Non-Compliance
The new passport-revocation rule allows the U.S. government to revoke the passports of those Americans who owe tax debt of more than $50,000 (including penalties). This is particularly dangerous in the case of Americans who may have acquired U.S. citizenship by being born in the U.S.A, or even if one of their parents is a U.S. citizen and has never filed a U.S. tax return. In such cases, the person could be liable to a significantly high amount of interest and penalties.
These are just some of the tax problems U.S. taxpayers living abroad may face. Many taxpayers considering renouncing their U.S. citizenship. Unfortunately, it is not that easy, and may cost far more than complying with the IRS. Keep an eye out for the upcoming articles listed above to learn more or give us a call today!
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns, please contact us. We are a team of highly experienced tax professionals with extensive knowledge of U.S. and Canadian cross-border compliance as well as U.S. and Canadian tax laws.
As a full service accounting firm, we are dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. 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:
- 416-238-5920 (Greater Toronto Area, ON)
- 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.
