Tax Filing for Americans in Canada

Philip Porado
by Philip Porado April 13, 2017 / No Comments

It’s the last thing anyone wants to do at tax time—file a whole extra return.

For Americans living in Canada, though, it’s an annual fact of life, and the Foreign Account Tax Compliance Act (FATCA) passed in response to the 2008 financial crisis makes the matter more urgent for U.S. citizens residing outside that country.

Finalized in 2010, FATCA was designed to help shore up a U.S. Treasury depleted by deficit spending needed to offset the worst effects of the credit crisis by seeking tax payments from citizens keeping sizable holdings abroad.

One consequence of the Act was a rush by many Americans residing overseas to file delinquent returns or to disclose non-U.S. assets. It also called into question the status of certain Canadian tax-sheltered accounts, which depending on which lawyer you ask may or may not be classified as foreign trusts. The U.S. Internal Revenue Service (IRS) has yet to provide clear guidance on those accounts.

On the bright side, FATCA established a regime to help U.S. citizens (many of whom are what tax planners call “accidental Americans” born stateside to non-U.S. parents, or the children of U.S. citizens residing abroad) come into compliance with IRS rules.

And, comply you should, because there are non-monetary penalties, including being denied entry into the U.S. when trying to visit family. I have, on more than one occasion, been asked upon presenting my U.S. passport to a Department of Homeland Security officer, whether I file my tax return every year.

In my case the answer is always ‘Yes’ because my Canadian immigration process included some pointers on overseas tax compliance. And, since I used a professional accountant for my tax return the first year I lived here, I benefitted from a lecture about the need to file in order to preserve my hard-earned vesture in the U.S. Social Security system.

The good news is, for most taxpayers, filing a U.S. return is really quite easy. Provided you have income from a single employer, and don’t have complicated investments, the entire return is only five pages long.

You need two forms, a U.S. Individual Tax Return, Form 1040, which is your actual tax return, and a Foreign Earned Income Form, 2555, a schedule on which you report wages, interest and any other income you earned outside the U.S. during the course of the year.

Filling the 1040 is straightforward, and for Canadian residents involves filling in a lot of zeroes once you get to Page 2 of the form. The most common mistake overseas filers make happens on Line 7 of the 1040—by putting in the Canadian dollar amount for wages, salaries, tips, etc. income as it appears on the T4.

It’s easy to forget this is a U.S. form, but it’s important because of the divergent values of the currencies. Americans living in Canada are granted what the IRS calls an Earned Income Exclusion, below which they do not owe U.S. tax. For the 2016 filing year, IRS excludes US$101,300 of income from taxation (which at the current exchange rate is a bit below C$135,000).

That last bit is important. The first thing you need to do is run the wages number from your T4 through a currency converter to ensure you’re reporting the correct amount. (If you made C$100,000 in 2016, you only have to report earning US$75,149 to the IRS.) So, US$75,149 is what goes in the box on Line 7 of the 1040.

Form 2555 is also easier than it looks. If you’re a dual national, say so on Line 7 and put the date you obtained Landed Immigrant status in Canada on Line 9. Unless you’re a student or someone who’s being sponsored to work in Canada or have been assigned here by an overseas employer, you probably don’t have to fill out Part II, Part VI, Part VIII or Part IX.

You do have to keep track of vacations to properly fill in Part III, but if you’ve lived and worked in Canada, excepting a standard vacation allotment, you’ll qualify under the physical permanence tests. That puts your qualifying days in the country for Line 38 at 365.

Shifting back to the 1040, you need to separately list interest income, pension income and so forth, all converted to U.S. dollar amounts. You’ll skip a lot of lines because Americans residing in Canada usually don’t have U.S. income vehicles like IRAs or Health Savings Accounts. From there, provided your income is below the allowable threshold, you take your standard deduction and your deduction for the number of dependents you can legitimately claim.

You won’t get a refund, except in unusual years when the U.S. Congress votes a universal tax cut and sends everyone a cheque, but you won’t owe anything either.

Sign it. Stamp it. Mail it.

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Flickr: Bradley Gordon