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How Tax Planning Can Help File Your U.S. Taxes In Canada

How Advanced Tax Planning Can Help File Your 2023 U.S. Taxes from Canada in 2024

Thanks to its proximity to the United States and close business ties with the United States, Canada has increasingly been the top destination for American expats. There are more than 1  million Americans living in Canada (1). Navigating the complexities of U.S. international tax and cross-border tax rules can be challenging for American expats. The differences in tax rules between the United States and Canada often necessitate the guidance of experienced cross-border tax and U.S. international tax advisors. Qualified U.S. international tax advisors are essential for ensuring tax compliance and helping American expats understand their tax filing and reporting obligations in Canada and the United States. Over the years, many American expats have trusted our professional acumen for their U.S. tax compliance and U.S. tax planning needs. Our experience in U.S. international tax and cross-border tax compliance and planning has been a key factor in their choice.

Our main priority is to help you properly and timely file U.S. taxes from Canada worry-free and abide by extensive and complicated tax filing and reporting obligations. Expats must annually report their entire income and assets, just as they did before moving abroad.

Practice Note

One of common misconceptions American expats living in Canada or other high-tax country have is that they are not required to file U.S. tax return because it results in zero U.S. tax liability. So, they think, why bother and waste the money on tax return preparation fees… Unfortunately, this does not exempt you from filing a U.S. tax return, when required. Although it is true that in most cases there is zero U.S. tax owed on one’s U.S. tax return in those scenarios, the reason for zero or minimal U.S. tax liability is due to the applicable credits (such as Foreign Tax Credit) and exemptions/exclusions (such as Foreign Earned Income Exclusion). Those credits/exemptions/exclusions can be claimed on a timely filed U.S. tax return. Failure to file a U.S. tax return, when required, may lead to adverse tax consequences, hefty penalties, and other negative consequences.

Although moving to a high tax jurisdiction, such as Canada, may not necessarily result in any residual tax liability on one’s U.S. tax return (for example, due to availability of a Foreign Tax Credit for higher taxes paid in Canada), there are numerous instances when notwithstanding higher Canadian taxes paid, an expat ends up owing to U.S. Government on their U.S. tax return.

Practice Note

American expats are required to disclose their non-U.S. bank accounts and financial assets, once they meet applicable thresholds. The disclosure is made on Form FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Department of Treasury via BSA e-filing system and on Form 8938, Statement of Specified Foreign Financial Assets (filed with U.S. tax return). Penalties for willful FBAR filing violations are draconian – for 2024, the penalties for willful FBAR violations are $161,166 (this amount is being indexed for inflation every year) or 50 percent of the highest maximum account value/balance, whichever is greater. A penalty for non-willful FBAR violation is $16,117 (this is the 2024 amount indexed for inflation).

We are qualified U.S. international tax and cross-border tax professionals who regularly deal with complex U.S. tax compliance and careful tax planning to mitigate adverse tax consequences that may arise if one’s taxes are not managed properly. U.S. Tax IQ is here to answer your questions and provide peace of mind during the tax season.

The foremost value offered by qualified U.S. international tax and cross-border tax advisors for American expats lies beyond merely preparing “zero” U.S. tax returns. Their crucial role is in identifying and pinpointing specific transactions and circumstances that may trigger additional filing and reporting requirements, which are easy to overlook. Missing those requirements can result in significant penalties. Thus, a key aspect of a qualified U.S. international tax and cross-border tax advisor’s role is to protect clients from such penalties and to mitigate the impact of any adverse consequences arising from these complex tax situations.

What is the Due Date for Filing a 2023 U.S. Income Tax Return?

The general due date for filing a federal individual income tax return is April 15th. Your return is considered timely filed if it is filed no later than the above mentioned date. When a filing due date falls on a weekend or a holiday, the due date is the next business day. For example, for the 2022 tax year, the filing deadline was April 18, 2023.

If you are currently residing outside the United States, which is relevant to most American expats, you are automatically entitled to a 2-month extension until June 17th. Note that the automatic 2-month tax return filing extension does not extend the due date of paying your taxes – it remains April 15. If you owe any U.S. tax, you should make the payment by April 15 for it not to be considered late.

If you did not manage to file your U.S. income tax return on time (for example, you may be waiting on Schedule K-1 from a partnership that typically provides Schedules K-1 to its partners after an extended partnership filing deadline of September 15), you can request a six-month extension by filing Form 4868 with the IRS (for those of you who got an automatic 2-month extension, filing Form 4868 would extend your filing deadline by 4 (four) months until October 15. That extension does not require consent from the IRS and is automatically granted. If you filed an extension, your filing deadline extends to October 15, and filing by that date is considered timely.

There is another limited 2-month extension for taxpayers residing outside the United States (that includes most American expats). This extension is valid until December 16, but an extension request must be filed with the IRS, and the extension requires the IRS consent.

Practice Note

When filing an extension request, taxpayers (including American expats) should ensure that they use the mailing and private delivery methods authorized by the IRS so that they can prove timely filing, if needed. The IRS has a list of acceptable private delivery services on its website: https://www.irs.gov/filing/private-delivery-services-pds (last visited February 1, 2024).

Taxpayers should equally ensure that they send their requests and tax returns to the applicable IRS service center address. For example, private delivery services should use the addresses noted on the IRS website: https://www.irs.gov/filing/submission-processing-center-street-addresses-for-private-delivery-service-pds (last visited February 1, 2024).

U.S. Filing Deadlines and Forms

We created a reference chart on our website that provides a detailed list of IRS forms and applicable filing deadlines based on category of the taxpayer, individual or business, as well as based on the taxpayer’s tax residency status – resident or nonresident.

CHECK YOUR DEADLINE

For further information, refer to Publication 54, IRS Tax Guide for U.S. Citizens and Resident Aliens Abroad. Please note that this link may not be updated and you should ensure that you are accessing the current publication with respect to the tax year you are filing for.

How do I File 2023 Taxes as an American Citizen if I Live Abroad?

U.S. citizens and green card holders living in Canada are required to file a U.S. tax return each year when they meet the applicable filing and reporting requirements. As an American citizen, you have an ongoing U.S. tax obligation to report your worldwide income, no matter the source, even when you file and pay taxes in the country where you reside (even when the taxes in such foreign country are higher than in the United States, as we discussed earlier).

American taxpayers with foreign bank accounts or financial assets that in the aggregate exceed US $10,000 in value or account balances are required to file with the U.S. Department of Treasury Form FinCEN 114 (Report of Foreign Bank & Financial Accounts (FBAR)). Please note that this link may not be updated and you should ensure that you are accessing the current information relevant to the tax year for which you are filing the respective return or form. Note that you must disclose all of your foreign bank accounts and certain financial assets, once the filing threshold is met, even those with zero balances. Penalties for failure to file FBAR or to file FBAR on time are substantial, even for non-willful violations. You should consult your qualified U.S. tax advisor to ensure you understand your U.S. tax filing and reporting obligations to stay compliant. FBAR is filed electronically using the BSA e-file system. You can access it here: https://bsaefiling.fincen.treas.gov/main.html#blueSection (last visited February 1, 2024).

If your foreign financial assets exceed US $200,000, you must abide by the FATCA filing requirements and may be required to file Form 8938, Statement of Specified Foreign Financial Assets. Please note that this link may not be updated and you should ensure that you are accessing the current information relevant to the tax year for which are you filing the respective return or form. Form 8938 is attached to your U.S. tax return. If you are not required to file a U.S. tax return, even if you meet Form 8938 filing threshold, Form 8938 then should not be required to be filed. You should consult your qualified U.S. tax advisor for any questions related to your particular facts and circumstances and to determine your applicable U.S. tax filing and reporting obligations and responsibilities.

Choosing to deliberately skip U.S. tax filing or additional asset reporting can result in steep fines, a revoked passport, and even jail time. It is imperative to work with a qualified cross-border tax advisor to ensure that you are adhering to the appropriate IRS procedures and requirements.

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Do Dual Citizens Pay U.S. Taxes?

U.S. citizens who have dual U.S. / Canadian citizenship must continue filing taxes in the United States. U.S. citizens living in Canada may be required to file taxes in both countries depending on their facts and circumstances.

American citizens may take advantage of various mechanisms to mitigate potential double taxation, including, for example:

  • Foreign Tax Credit – U.S. tax law allows a dollar-for-dollar credit for income taxes paid in Canada or outside the United States, subject to various limitations.
  • Foreign Earned Income Exclusion – U.S. tax law also allows you to exclude from U.S. income foreign earnings, provided you meet certain requirements.
    • For the 2023 tax year, the amount of Foreign Earned Income Exclusion is US $120, 000.
    • For the 2024 tax year, the amount of Foreign Earned Income Exclusion is US $126,500.

Do Canadian Citizens Need to File a U.S. Tax Return?

If you are not a U.S. citizen or a Green card holder or are not otherwise treated as a U.S. tax resident, you are generally only required to file U.S. tax return and be subject to U.S. tax if you have income from U.S. sources.

If you work in the United States, even for a day, you may be subject to U.S. tax and/or have U.S. tax return filing requirements. If you are working in the United States for a Canadian-based employer, you generally would be subject to U.S. taxation if your compensation from services performed while you were physically present in the United States exceeded US $3,000.

The Canada-U.S. income tax treaty provides limited exemption for Canadian-based employees working in the United States on behalf of their Canadian employer. Such Canadian-based employees should not be subject to U.S. tax, if their compensation did not exceed US $10,000 or if they were not present in the United States for more than 182 days during a twelve-month period, and the compensation was not paid by, or on behalf of, a U.S. resident or borne by U.S. permanent establishment of their Canadian employer. Notably, if you qualify for the exemption, to claim it, you must file a U.S. tax return and attach Form 8833, Treaty-Based Return Position Disclosure. Please note that this link may not be updated and you should ensure that you are accessing the current information relevant to the tax year for which are you filing the respective return or form.

Please note that there are many other factors that may require a Canadian to file a U.S. tax return or pay U.S. tax. You should consult your qualified U.S. tax advisor to ensure the applicable tax compliance.

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We are qualified U.S. international tax and cross-border tax advisors who can assist you with an understanding and addressing your U.S. tax filing and reporting requirements.

Tax Season is Here – Ensure You’re Prepared with Qualified U.S. Tax Planning
Get started on your U.S. taxes today and manage your income properly, wherever you are! Consult one of our tax planning advisors here.

See: https://en.wikipedia.org/wiki/Immigration_to_Canada (last visited February 1, 2024).

 

DISCLAIMER: Please note that the information contained in this article is general in nature, is current only as of the date of posting the respective information on the website, and does not (nor is intended to) provide legal or tax advice or an opinion on any matter or issue discussed. You should consult your qualified U.S. tax advisor for any advice on any matters or issues discussed in this article. 

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