Filing Tax Returns for U.S. Citizens Living in Canada

Over 1 million US citizens are living in Canada. Yet, many of them are unaware of their tax filing obligations. Read more to learn about what you should do so that you will never have to miss a tax filing deadline again.

US Personal Tax Return – Form 1040

As a US citizen, you must file a US Personal Tax Return, form 1040, by April 15 of each year, even if you don’t have any US income. On this return, you must report and pay US income taxes on your worldwide income. If you are residing outside of the US on April 15, then you get an automatic extension to file Form 1040 until June 15. Remember to file on time, as the late filing penalty is 5% per month of the tax balance owing on the filing due date.

FBAR

If you have a bank or financial accounts outside of the US with a total combined value of $10,000 or more at any point in time during the year, then you must report these accounts on a special information return called the FBAR. Bank and financial accounts include Canadian checking accounts, Canadian savings accounts, Canadian brokerage accounts, TFSAs, RRSPs and so on. The FBAR filing deadline is the same as for your US Personal Tax Return. Failure to file with the IRS can result in a penalty of $10,000 for each bank and financial account not disclosed.

Foreign Tax Credit

Without foreign tax credits, you would be double-taxed as a US citizen working and living in Canada. You would first pay tax to the Canada Revenue Agency on your salary and then again to the IRS upon filing your US Personal Tax Return. Fortunately, you can avoid the double tax problem by completing and submitting Form 1116 to the IRS. With this form, you can claim a foreign tax credit to reduce your US income taxes for all or a portion of the Canadian taxes you paid. Given that Canadian tax rates are higher than US rates, you likely won’t owe any US taxes if most of your income is from Canada.

Registered Education Saving Plan

If you contributed to an RESP for your child, you must file two forms each year with the IRS – Form 3520, due on the same date as your US Personal Tax Return is, and Form 3520-A which is due on March 15. Because the IRS treats an RESP as a foreign trust, you must pay US taxes on the income earned each year by your child’s RESP.

Canadian Personal Tax Return

Your Canadian personal tax return, form T1, is due on April 30 of each year. As a resident of Canada, you are liable for Canadian income taxes on your worldwide income, which must be reported on your T1 return. Similar to the US, Canada also allows you to claim foreign tax credits for US taxes paid in order to avoid double taxation.

So Here’s the Tip:

Remember to file your US Personal Tax Return each year with the IRS, even if you are living outside the US. Complete the FBAR for foreign bank and financial accounts that you own. Claim foreign tax credits to avoid double taxation. And finally, if you contributed to an RESP, complete and send forms 3520 and 3520-A to the IRS.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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