Uncle Sam is Calling: How to Smoothly File U.S. Tax Returns From Canada [2023 Edition]
The U.S. tax season is in full swing and knowing how to file U.S. taxes from Canada may be crucial to you. If you are a U.S. expat living in Canada or a Canadian businessman with U.S. source income, you may be required to file a U.S. federal tax return for the 2022 tax year. Importantly, you may also be required to file a U.S. state tax return.
In general, U.S. citizens and Green card holders have U.S. tax filing obligations irrespective of where they live. Being subject to taxes in more than one country can be challenging and is not simple. The process of filing U.S. taxes from Canada can get tricky for a number of reasons.
U.S. citizens and Green card holders residing in Canada face stringent compliance requirements in order to keep up with their tax filing and reporting obligations in both countries. This is also a very time-consuming process, as the tax laws and relevant tax relief provisions are numerous and are constantly changing. Importantly, the U.S. international tax law is very complex and is not easy to follow for a layperson. Even tax professionals not practicing in the U.S. international tax and cross-border taxation may not be up to the task. A layperson with no vested knowledge in this area could not only miss out on valuable exemptions, but also miss important deadlines, which can lead to substantial penalties.
In this article, we explain how to start getting your U.S. tax affairs in order and what you need to know to stay fully compliant.
Do I Have to File U.S. Taxes if I Live in Canada?
The United States is the only industrialized country that taxes its citizens and residents on a worldwide basis. U.S. citizens and Green card holders are taxed on their worldwide earnings, regardless of where they live. In addition, there are significant tax reporting and disclosure obligations that must be complied with. As such, if you’re an expat living in Canada, you should consult with a qualified U.S. tax advisor to determine your U.S. tax filing and reporting obligations and to ensure proper tax compliance.
As a Canadian, you may be required to pay U.S. tax, or at least have a U.S. tax return filing requirement, to report income from performance of services in the United States, including commissions, wages, salaries, consulting fees, interest, dividend, rent, capital gains, royalties from U.S. sources. The U.S. Internal Revenue Code and the U.S. Treasury regulations contain numerous exemptions and exceptions from exemptions. The taxation in many cases depends on tax residency and the ability of U.S. persons to use foreign tax credit to offset some or all of foreign taxes paid. Different transactions may warrant an unexpected U.S. tax treatment. For example, the fact that a transaction is not taxable in Canada does not mean that it won’t be taxable in the United States. In addition, where in Canada one may not be required to file a tax return or report certain transactions in the absence of profit, this in many cases won’t be true in the United States.
This is a complex area of the tax code, and many fall prey to U.S. tax and cross-border taxation rules. Preparing your tax return requires proper planning to minimize or eliminate potential double taxation. In a majority of cases, you must file a tax return even if you do not owe any tax. This would be true for many dual U.S./Canada citizens who are able to claim foreign earned income exclusion or foreign tax credit to mitigate U.S. tax liability in most cases.
One of the best ways to stay abreast of your U.S. tax and cross-border tax obligations is to trust your filings to a qualified U.S. tax advisor.
Our team of trusted and experienced U.S. tax advisors at U.S. Tax IQ has the proficiency to apply complicated and at times confusing U.S. international tax rules to your factual background. There are a lot of nuances that a layperson may not recognize, take advantage of or avoid, if needed. Qualified U.S. tax advisors can identify these complexities and associated issues and determine the most optimal strategy for you.
U.S. Tax Forms
The big one – Form 1040 – U.S. individual income tax return that is filed with the IRS along with additional forms and schedules by U.S. persons (U.S. tax residents).
Canadian individuals who are not U.S. persons use Form 1040-NR. If they don’t have a U.S. Social Security Number (SSN), they need to apply for an IRS Individual Taxpayer Identification Number (ITIN).
Important Tax Filing Deadlines
The general tax filing deadline for U.S. residents is April 15th. If you reside in Canada or otherwise outside the United States and have U.S. tax filing obligations, you will be allowed an automatic 2-month extension from the general due date for filing an individual U.S. tax return. Accordingly, June 15th U.S. tax return filing deadline applies to most expats. An additional four-month extension can be requested to further extend the tax return filing deadline to October 15th. Although an affirmative action is required to request that extension (filing Form 4868 with the IRS), such extension is automatic and does not require a consent of the IRS. FInally, if you reside outside the United States and are unable to file your tax return by the extended deadline, you can request an additional 2-month extension. However, this extra extension request is subject to the IRS consent. You should consult with your qualified U.S. tax advisor to ensure that you can qualify for that extension in case you plan on requesting it.
Note that although your filing deadline may be June 15th (extended deadline), if you owe any tax, you are required to pay it by the April 15th deadline (general filing deadline). Otherwise, interest would accrue from April 15th until the date you make the payment. Even though in general Canadian individual income tax rates are higher than in the United States, a U.S. person filing a U.S. tax return and claiming foreign tax credit for taxes paid in Canada may end up with residual U.S. tax liability on their U.S. tax return. This may happen because of certain transactions that are tax-free in Canada, but are taxable in the United States, as well as due to the difference in tax treatment, timing for income inclusion, and other factors leading to potential double taxation or something extra on either side of the border.
Canadian individuals without U.S. wages are generally required to file U.S. tax returns (Form 1040-NR) by June 15th. Further six-month extension can be requested by filing with the IRS Form 4868. The U.S. tax return filing deadline is April 15th for those Canadians who have U.S. wages.
Do not forget other filing and reporting obligations, including Report of Foreign Bank & Financial Accounts (FBAR). FBAR is generally due by April 15, but because of an automatic extension currently in effect, the deadline is extended to October 15th.
Many taxpayers choose to file their taxes by April 15 as this makes it easier for their Canadian tax filings that are due by April 30. In addition, because Form 8938 (“FATCA Form”) is required to be filed by the due date of your individual income tax return, filing FBAR at the same time makes most sense.
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.