Cross-border tax for Dual Citizens of the U.S. and Canada can get very complex and challenging especially for dual citizens residing in Canada. The dual citizenship has its perks but can become difficult when it comes to filing taxes in both the U.S. and Canada due to double taxation, foreign reporting obligation, investments, retirement and continuous upkeep of the laws. Let us overview the three main issues an individual could undergo holding dual citizenships.
1 – Financial Reporting Obligations besides filing taxes for dual U.S. Canadian Citizens
Holders of Canadian bank accounts, Canadian retirement accounts, and other Canadian financial assets are required to file and report FBAR (Foreign Bank Account Report (FinCen Form 114)) and Form 8938 (Statement of Specified Foreign Financial Assets). Foreign Account Tax Compliance Act (FATCA) governs the foreign reporting for both FBAR and form 8938.
There are heft penalties for not reporting foreign accounts and assets which can go up to 50% of the total account value not reported.
2 – Obligations on U.S. border cross citizen tax-free accounts
It is a matter of extreme disappointment for the dual U.S. Canadian citizen that some of the tax-free investment, retirement, and saving accounts in Canada are not tax-free in the U.S. If you have a Canadian Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or a Registered Disability Savings Plan (RDSP), your incomes are subject to U.S. taxes.
There is hope through US Canada Tax Treaty, which provides special tax treatment to Canadian pensions and retirement accounts. The special treatment comes in the form of whether a reeducate tax rate is applied, tax exemption of certain type of income and tax credit. In majority of cases, a dual citizen is allowed to defer U.S. tax on undisputed earnings from a RRSP, RRIF, LIRA and other similar Canadian plans.
As per law, Canadian retirement and investment accounts are subject to report Foreign Bank and Financial Accounts (FBAR) and FATCA (Foreign Account Tax Compliance Act). Likewise, your Canadian Pension and Retirement plans require reporting on form 1040.
3 – IRS Amnesty Programs for non-compliant U.S. nationals
IRS has designed a series of Offshore Voluntary Disclosure Programs(OVDP)-Streamlined Foreign Offshore Procedures. This program allows overseas Americans to file overdue U.S tax returns and provide them an opportunity to bypass the penalties by getting a full penalty waiver and coming into compliance.
Following are two requirements for the Streamlined Foreign Offshore program:
- An applicant is non-willful; if you unknowingly violated the FBAR laws and failed to file the U.S tax returns.
- An applicant is a foreign resident; must have resided outside of the U.S for at least 330-days in at least one of the last three tax years that passed. Thus, must not have lived in the U.S. for at least one of the three most current tax years.
Have dual citizenship in the U.S. and Canada? AKF CPA is here to help with your taxes. Filing taxes in one country is enough to give anyone a headache, and it only gets more complicated for dual citizens of the U.S. and Canada. But no matter your situation, we’ve got a tax solution for you
