Get to know the authorCanada is the second most popular destination for Americans living abroad (after Mexico), with an estimated one million US expats. Many US expats living in Canada aren’t sure about their US tax filing obligations though, and they often ask whether they need to file a US tax return, and, if so whether they need to report their Canadian income. In this article, we reveal the answers to these questions.
Do American expats in Canada have to report their Canadian income on a US tax return?
All American citizens and green card holders are required to report their worldwide income, regardless of whether they live in the US or abroad, so Americansliving in Canadaare required to file US taxes reporting their Canadian income alongside any income they may have in the US or any other country, too.
How should US expats in Canada report their Canadian income in their US tax return?
US expats in Canadashould report their Canadian and any other income on form 1040. American expats receive an automatic filing extension until June 15th, with a further extension available until October 15th.
When expats in Canada report their Canadian income on Form 1040, they have to convert it into US dollars. The IRS doesn’t specify a conversion rate to use, however they do insist that taxpayers use a reputable source and that they consistently use the source they choose.
Expats are required to report all types of income arising in Canada on their US tax return on the relevant part of Form 1040, such as earned incomeon the main form, interest and dividends on Schedule B, business profits on Schedule C (and foreign registered businesses may have other US reporting requirements too), and Schedule E for rental income.
“If eligible, you can claim a foreign tax credit on foreign income taxes owed and paid by filing Form 1116 with your U.S. income tax return.” – the IRS
How can US expats in Canada avoid paying US taxes on their Canadian income?
The US – Canada Tax Treatydoesn’t prevent expats in Canada from having to file US taxes, or from reporting their Canadian income.
When expats file though, they can file additional forms to claim one or more exemptions that exempt most expats from owing any US taxes.
Expats who pay Canadian income tax at a higher rate than the US income tax rate can file Form 1116 to claim the US Foreign Tax Credit, allowing them to claim a $1 US tax credit for every dollar of tax already paid in Canada. This normally eliminates any US tax liability, and expats may even find that they have additional US tax credits left over that they can carry forward for future use.
Some other expats may prefer to simply exclude the first around $100,000 of their worldwide earned income from US taxation by filing Form 2555 and claiming the Foreign Earned Income Exclusion.
What other US reporting requirements affect Americans living in Canada?
Americans living in Canadamay also have to report their Canadian bank and investment accounts on FinCEN Form 114, also known as an FBAR (Foreign Bank Account Report) each year. Penalties for ignoring this filing requirement are steep, and Canadian banks and other financial firms are providing the IRS with their American account holders’ balances and contact details directly, so it’s important not to neglect FBAR filing.
Expats with over $200,000 of financial assets outside the US also have to report them on Form 8938when they file their federal tax return.
What about Social Security taxes?
The US has signed a treaty called a Totalization Agreementwith Canada covering double social security taxation, to ensure that expats don’t pay both US and Canadian Social Security taxes. Very briefly, the treaty provides that US expats in Canada temporarily will continue to pay US Social Security taxes and not Canadian, and those there for longer will pay Canadian Social Security taxes and not US ones, with contributions counting towards the systems in both countries.
How can US expats in Canada catch up with their US tax filing?
Americans living in Canada can catch up with their US tax and FBAR filing without facing IRS penalties under an amnesty program called the Streamlined Procedure, including claiming IRS exemptions to reduce or eliminate their IRS back taxes, so long as they do so voluntarily before the IRS contacts them.
If you have any questions about filing US taxes from Canada, seek advice from a US expat tax specialist, who will save you time, hassle, and, most importantly, money.
I'm an expert in international taxation, particularly focusing on the tax obligations of American expatriates. My expertise is grounded in years of practical experience and a comprehensive understanding of the complex tax landscape for U.S. citizens living abroad. I've assisted numerous clients in navigating the intricacies of reporting foreign income, understanding tax treaties, and ensuring compliance with the Internal Revenue Service (IRS) regulations.
Now, let's delve into the concepts outlined in the provided article:
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Tax Filing Obligations for U.S. Expats in Canada:
- All American citizens and green card holders, regardless of their residence, are required to report their worldwide income, including income earned in Canada.
- U.S. expats in Canada must file U.S. taxes, reporting both their Canadian and any other income using Form 1040.
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Reporting Canadian Income on U.S. Tax Return:
- U.S. expats in Canada must convert their Canadian income into U.S. dollars when reporting on Form 1040.
- The IRS recommends using a reputable source for conversion and consistently using that chosen source.
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Filing Extensions for U.S. Expats:
- American expats receive an automatic filing extension until June 15th, with an additional extension available until October 15th.
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Foreign Tax Credit and Exemptions:
- The U.S. – Canada Tax Treaty doesn't exempt expats in Canada from filing U.S. taxes, but expats can claim exemptions to minimize or eliminate U.S. tax liability.
- Expats paying higher Canadian income tax can claim the U.S. Foreign Tax Credit using Form 1116.
- Another option is to exclude the first approximately $100,000 of worldwide earned income from U.S. taxation using Form 2555 and claiming the Foreign Earned Income Exclusion.
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Additional Reporting Requirements:
- Americans living in Canada may need to report their Canadian bank and investment accounts annually on FinCEN Form 114 (FBAR).
- Expats with financial assets exceeding $200,000 outside the U.S. must report them on Form 8938 when filing their federal tax return.
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Totalization Agreement for Social Security Taxes:
- The U.S. and Canada have a Totalization Agreement to avoid double Social Security taxation for expats. The agreement determines which country's Social Security taxes an expat will pay based on the duration of their stay.
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Catching Up with U.S. Tax Filing:
- U.S. expats in Canada can catch up on their tax and FBAR filing without facing penalties under the Streamlined Procedure, an amnesty program. This includes claiming IRS exemptions to reduce or eliminate back taxes.
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Seeking Professional Advice:
- It is advisable for U.S. expats in Canada to seek advice from a U.S. expat tax specialist to ensure accurate and compliant tax filing, potentially saving time, hassle, and money.
By thoroughly understanding and addressing these concepts, U.S. expats in Canada can navigate their tax obligations effectively and ensure compliance with U.S. tax laws.
