Taxation of Americans in Canada

by Dale Walters, Sally Taylor, David Levine

Overview

Living in Canada and not paying as much in taxes is a privilege that many Americans enjoy -- or is it? Legally, the Internal Revenue Service (IRS) can collect taxes on US citizens no matter where they permanently reside. Even dual citizens or those who have lived in Canada for many years are subject to some IRS rules, some CRA rules, and the Canada-US Tax Treaty. Recently, the IRS has been cracking down and collecting taxes from its citizens who live in foreign countries. Author Dale Walters understands the fear and confusion that Americans may experience when confronted by the IRS and the CRA. In his book, Taxation of Americans in Canada, Walters seeks to calm those fears so that you can be proactive about the situation.

Product Details

ISBN-13:	9781770401471
Publisher:	Self-Counsel Press, Inc.
Publication date:	06/07/2016
Series:	Cross-Border Series
Edition description:	1st Edition
Pages:	176
Product dimensions:	6.00(w) x 9.00(h) x (d)

About the Author

Dale Waters is partner and CEO of Keats Connelly, the largest North American cross-border wealth management firm. He holds a BS in Accounting, is a Certified Public Accountant, Personal Financial Specialist, CERTIFIED FINANCIAL PLANNER™ Professional (US and Canada), and a NAPFA Registered Financial Advisor. He was named Top US Financial Advisor by Mutual Funds Magazine in 2001 and 2002.

Sally Taylor is a partner and the Director of Financial Planning at
KeatsConnelly. She holds a BS in Accounting, an MS in Financial
Planning, is a US Certified Public Accountant (CPA), Personal Financial
Specialist (PFS), and CFP™ Professional in the US. Sally lives in
Arizona.David Levine is a partner and an International Tax Manager at
KeatsConnelly. He has a degree in Accounting, is a Canadian Chartered
Accountant (CA), and a US Certified Public Accountant (CPA). David lives in Florida.

Table of Contents

1 Before You Go to Canada 1
1. Planning Your Move 1
2. Expatriation 3
2.1 Relinquishing US citizenship 3
2.2 Relinquishing Lawful Permanent Resident status 4
3. Your Rights after US Citizenship Is Terminated 8
3.1 The Reed Amendment 8
4. Tax Planning before You Go 9
4.1 US bank and nonqualified brokerage accounts 9
4.2 Nonqualified US brokerage accounts 10
4.3 Qualified accounts 11
4.4 Cashing out your IRA, 401(k), or RRSP 11
2 Your First Year in Canada 13
1. Overview of Filing Requirements When You Are in Canada 13
2. Determining Canadian Residency 14
3. First Things First 15
4. Deemed Acquisitions 15
5. First-Year Tax Filing 16
6. Contributions to Retirement Plans 18
6.1 RRSP deduction limit formula 19
7. Social Security 20
Contents iv Taxation of Americans in Canada
8. Differences in How Certain Income Is Taxed 20
8.1 Dividends 20
8.2 Capital gains 21
8.3 Gambling winnings 21
8.4 Registered accounts 21
8.5 Alimony 21
9. Deductions and Credits 22
10. US Filing Requirements 23
11. The Totalization Agreement 24
12. Canadian Health Insurance 25
3 An Overview of Canadian Taxation 26
1. Two Important Points to Set the Stage 26
2. History of Canada Revenue Agency (CRA) 28
3. Filing Requirements in Canada 29
3.1 Unwinding a previous deemed disposition 30
4. Summary of Major Differences between Canadian and US Taxes 31
5. Filing Requirements in the US 32
5.1 When to file your individual income tax return 34
5.2 Electronic filing 34
6. Penalties and Interest for Underpayments, Late Filings,
and Late Payments 35
6.1 United States 35
6.2 Canada 35
7. Filing Status 36
8. Address Changes 36
8.1 Notifying the IRS when you have a change of address 36
8.2 Notifying CRA when you have a change of address 37
9. Overview of Entity Taxation and Rates 37
9.1 Partnerships 37
9.2 Limited Liability Companies 38
9.3 Trusts 38
9.4 Corporations 38
10. Carrying Charges 40
11. Alternative Minimum Tax 41
11.1 Canadian Alternative Minimum Tax 41
11.2 US Alternative Minimum Tax 42
Contents v
12. Residency 43
12.1 Step 1: Determine if you have residential ties with Canada 47
12.2 Step 2: Determine your residency status and its tax implications 48
13. Tax Audits and Dealing with the CRA 49
13.1 The CRA examination (audit) process 49
14. Dealing with the CRA 50
4 The Treaty 52
1. History of the Canada-US Tax Treaty 52
1.1 The relationship of the “laws of the land” to the Treaty 53
2. Treaty Overview 53
3. Inside the Treaty 54
3.1 Saving clause 55
3.2 Disclosing treaty benefits claimed 55
4. Residency 55
5. Real Property 57
6. Dividends, Interest, and Royalties 58
7. Gains on Personal Property 59
8. Personal Services 59
9. Artists and Athletes 59
10. Pensions and Annuities 60
11. Social Security 62
12. Government Service 62
13. Students 62
14. Taxes Imposed by Reason of Death 63
5 Foreign Tax Credits 64
1. What Are Foreign Tax Credits? 65
2. The Foreign Tax Credit in Canada 65
2.1 Foreign non-business income tax credit 66
2.2 Foreign business-income tax credit 69
3. The Foreign Tax Credit in the US 69
6 Retirement Plans, Pensions, and Social Security 71
1. US Taxation of Canadian Retirement Plans 71
1.1 Canadian pension contributions 71
1.2 Spousal RRSP 72
vi Taxation of Americans in Canada
1.3 Pension withdrawals 72
1.4 Old Age Security and Canadian Pension Plan contributions and benefits 73
2. Canadian Taxation of US Retirement Plans 74
2.1 Contributions to US retirement accounts 74
2.2 Pension withdrawals 75
2.3 Social security 76
2.4 Planning for US retirement accounts 77
2.5 Rolling your US account into an RRSP 79
3. The Totalization Agreement and the Windfall Elimination
Provision (WEP) 80
7 Investing in Canada 82
1. Comparing the US and Canadian Securities Markets 82
2. Taxation of Dividends in Canada 86
2.1 Eligible dividend rules 86
2.2 Dividends and corporations 87
2.3 Designating an eligible dividend 87
3. Basics of the US Net Investment Income Tax (NIIT) 88
3.1 Planning opportunities 89
3.2 Net investment income defined 89
3.3 Reporting net investment income 90
3.4 Foreign tax credits 90
3.5 Calculation examples 90
4. Savings Accounts for Retirement and Education 91
4.1 General information 91
4.2 Canadian Education Savings Grant (CESG) 91
5. Real Estate 92
5.1 Depreciating real estate 94
8 Common Deductions on Canadian Income Taxes 95
1. Employment or Office Deductions 97
2. Business Deductions 98
2.1 Advertising expenses 100
2.2 Meals and entertainment 101
2.3 Bad debts 101
2.4 Insurance 101
2.5 Interest 101
2.6 Other loan costs 101
Contents vii
2.7 Salaries, wages, and bonuses 102
2.8 Private health services premiums 102
2.9 Motor vehicle expenses 102
2.10 Other expenses 104
2.11 Capital cost allowance 104
2.12 Lifetime capital gains deduction 105
2.13 Qualified farm property and qualified fishing property 107
3. Other Personal Deductions 107
3.1 RRSP contributions 107
3.2 Split pension amount 107
3.3 Child care expenses 108
3.4 Disability support 108
3.5 Moving expenses 108
3.6 Spousal and child support payments 109
3.7 Deduction for foreign non-business income tax 109
3.8 Other deductions 110
4. Nonrefundable Tax Credits 110
4.1 Basic personal credit 111
4.2 Spouse or common-law partner credit 111
4.3 Eligible dependent credit 112
4.4 Infirm dependent credit 112
4.5 Caregiver credit 112
4.6 Universal child care benefit 112
4.7 Age credit 113
4.8 CPP and QPP credits 113
4.9 Employment Insurance (EI) credit 113
4.10 Pension income credit 113
4.11 Canada employment credit 113
4.12 Volunteer firefighters’ and volunteer search and rescue credit 113
4.13 Adoption expenses credit 114
4.14 Public transit passes credit 114
4.15 Children’s fitness credit 114
4.16 Children’s arts credit 114
4.17 Disability credit 114
4.18 Medical expenses credit 114
4.19 Home buyer’s credit 114
4.20 Donations and gifts credit 115
viii Taxation of Americans in Canada
4.21 Interest paid on student loans credit 115
4.22 Federal dividend credit 115
4.23 Overseas employment tax credit 116
4.24 Federal foreign tax credit 116
5. Refundable Tax Credits 117
5.1 Refundable medical expenses 117
5.2 Refundable GST/HST credit 117
5.3 Working income credit 118
9 Tax Planning 121
1. The Direction Your Planning Should Take 121
2. US Foreign Account Filing Requirements 122
2.1 If you own a Canadian corporation 123
2.2 If you own a Canadian trust 127
2.3 Registered Education Savings Plans 128
2.4 Tax-Free Savings Accounts 128
2.5 US entities 129
2.6 Principal residence 129
2.7 Other issues 130
3. Tax Planning Ideas 130
4. An Overview of the Tax Benefits of Moving to the US 131
10 Canadian and US Death Taxes 132
1. Canada’s Death Tax: Deemed Disposition of Property 132
2. Gift Tax in Canada 134
2.1 Attribution rules 134
3. Probate in Canada 135
4. US Death Taxes 135
4.1 Estate tax issues for expatriated US citizens 135
4.2 Passing assets to a non-citizen spouse 138
4.3 Jointly held property 140
4.4 Issues for non-US persons (citizens or green card holders) who own US property 141
4.5 Treaty 142
5. US Foreign Trust Rules 146
11 Tax for Americans Living in Canada 147
1. US Citizens 147
2. Green Card Holders 148
Contents ix
2.1 The Treaty as it applies to green card holders 148
2.2 Termination of green card status 148
2.3 Expatriation 149
3. Surrendering Your Green Card 149
3.1 Long-term residents of the US 150
4. Substantial Presence Test 153
4.1 Days of presence in the US 154
4.2 Exempt individual 154
4.3 Closer connection exception 155
5. Residency Starting and Ending Dates 155
5.1 Starting date under the green card test 155
5.2 Starting date under the substantial presence test 156
5.3 Starting date under the first-year choice 157
5.4 Starting date under the terms of the treaty 158
5.5 Residency during the next year 158
5.6 Ending date under the green card test 159
5.7 Ending date under the substantial presence test 159
5.8 Statement required to establish your residency termination date 160
6. Foreign-Earned Income Tax Exclusion 160
6.1 Bona fide residence test 161
6.2 Physical presence test 161
6.3 Housing exclusion 162
7. Owning Real Estate in the US 162
8. Foreign Trust Rules 164
8.1 Canadian foreign trusts 164
8.2 US foreign trusts 165
8.3 General rules of trust taxation 165
8.4 Throwback rule 167
8.5 Transfers to a foreign trust 169
8.6 Loans from foreign trusts; intermediary transfers 169
8.7 Tax reporting 169
12 Americans in Noncompliance with the IRS 171
1. Ways of Becoming a US Citizen 171
2. Reporting of Foreign (Non-US) Bank and
Financial Accounts 172
2.1 Signature authority 173
x Taxation of Americans in Canada
3. Offshore Voluntary Disclosure Program 174
3.1 Streamlined filing procedures 174
3.2 Eligibility for the streamlined foreign offshore procedures 176
3.3 Scope and effect of procedures 178
3.4 Specific instructions 179
3.5 Eligibility for the streamlined domestic offshore procedures 181
3.6 Scope and effect of procedures 181
3.7 Specific instructions 182
Resources 187
Tables
1 Comparison When Cashing Out Accounts 12
2 Do You Have to File a US 2015 Federal Tax Return? 33
3 Canadian Corporate Tax Rates 39
4 Tax Rates for Canadian-Controlled Private Corporations 42
5 Combined Maximum Personal Tax Rates 2016 43
6 Provincial/Territorial Tax Rates for 2016 44
7 Canadian Federal Individual Tax Calculation 46
8 US Required Minimum Distribution Table 78
9 Minimum RRIF Distributions (Canada) 79
10 Pros and Cons of Rolling 401(k) or IRA to an RRSP 80
11 Stock Markets 83
12 Stock Sectors 83
13 A US-Canada Stock Market Comparison 85
14 Thresholds for US NIIT 88
15 Comparison of 529 Plans versus RESP Accounts 93
16 Determining Taxable Income in Canada:
Federal Individual Tax Calculation 96
17 Commonly Used CCA Classes 106
18 Disability-Related Tax Measures 109
19 Credits and Prorating 111
20 Non-Eligible Dividend Gross-Up Percentages and Tax Credits 116
21 GST/HST Credits 118
22 Summary of 2016 Nonrefundable Personal Tax Credits 120
23 Comparison of Form 8938 and FBAR Requirements 124
24 Court Probate Costs 136