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Dual Citizens and Double Taxation

Dual Citizens and Double Taxation

“It’s kind of cool to be a dual citizen,” I used to tell people, “you are able to cross the border easier, you have work options in the USA, and you can even vote for President if you are so inclined.” My attitude has completely reversed in the last year. I should warn that a lot of what I am about to say is basically sour grapes.

In case you haven’t paid attention to this ongoing taxation saga in the news (what, not everyone love a good tax story?) many Canadian citizens, or long-time Canadian residents have recently found out that Uncle Sam and the IRS are hot on their trail. I happen to be one of these souls that now has patriotic duties in each country to fulfill.

If you are in the same boat as myself, chances are you had likely never heard of this tax filing obligation for dual citizens. The reason is has come to my attention (and many others’) lately is because as of 2013 the IRS is forcing Canada’s financial services to show them our records.

The Land of The Tax Grab

The whole situation is a result of the unique double taxation policy of the American government. The USA is one of the only governments in the world that taxes people based on their citizenship and not their residency status. This means that you can live in Canada, work in Canada, and in theory, never actually have ever been to the USA, but still owe taxes to the IRS.

If you’re confused, don’t worry, you’re in good company. There are roughly a million Canadians in this boat, and most of them don’t even know that they need to file taxes, or are determined to stick their heads in the sand until this goes away. Needless to say, I’m not interested in that tactic.

The fact is that if you were born in the USA, or one of your parents was born in the USA, you are likely considered an American citizen by the USA government. It doesn’t matter if you call yourself a Canadian. It doesn’t matter if you don’t want to be an American (just wait until I tell you how difficult it is to go down that road), it definitely doesn’t matter if you already paid Canadian taxes on your income. None of those things precludes you from your patriotic duty of filing USA tax returns in the eyes of Uncle Sam and the yawning American debt machine.

You Don’t Owe Taxes… Just 25% Of Your Bank Account

Now that I’ve scared a million Canadians half to death, here is the good news. Almost none of you owe any taxes. Without going into mind-numbing detail, the basic idea is that the USA and Canada have a bunch of deals that mean that Canadian residents will almost never have to pay taxes in the USA.

There are some unique circumstances with investing large amounts of money, or owning your own business where I think it might be possible, but I’m not sure. For people that simply work in Canada and have a fairly simple tax situation, I can almost guarantee that you don’t owe any tax dollars.

What you may owe, especially if you choose to wait until the IRS comes after you, is all kinds of penalties for not filing your taxes. There are many forms that have to be filled out going back six years, and none of them are really made for easy reporting for people in our position. For some of these forms, the IRS can actually seize 25% of everything in that account as a penalty for non-compliance.

Is Not Filing an Option?

As an American citizen who lives and works in Canada you have to file a million (figuratively speaking) forms that go back at least six years, and then a bunch every year after that. I am in the process of doing this right now. Some of these forms have huge penalties (up to 25% of the entire life’s savings in some cases) if they are not filed on time.

Right now there is a sort of vague amnesty in effect, but that will run out eventually. If I was single, or married to someone who was not an American I would pursue renouncing my American citizenship (even though this is extremely difficult to do, and costs hundreds of dollars); however, my significant other is an American and has a lot of family in the USA.

Guess how they treat former American citizens who “don’t want to be American” any more at the border? Yeah… it’s worse than whatever you just pictured. The fact is that every American citizen in Canada has to file a basic 1040, and likely a Form 2555 and a FBAR (foreign bank account report).

If you have a RESP or a RRSP that becomes another headache. TFSA’s are not recognized in the States as well, so have fun with that. I am right in the middle of this tax filing mess right now. I was quoted “around $1000” to bring my tax situation up to date, and that was from a family friend. I have heard of H&R block gouging people for around $3,000 just to file that recommended six years’ worth of returns. Then you still get to continue to pay every year. I’m trying to do this on my own because I’m too cheap to pay that much money, but let me tell you, I’m reconsidering this adventure (and I find the Canadian tax system pretty easy).

Taxation Without Representation

The bottom line is that the USA is using a massive fishing net to try and catch a couple of big whales. In attempting to get tax evaders (I’m still trying to figure out who in the heck looks to Canada as a tax shelter) the IRS has put hundreds of thousands of innocent people in their crosshairs.

So far the Canadian government doesn’t seem at all interested in standing up to the their big brother, and I highly doubt any elected American official gives a crap because we can’t vote for Senators or House Representatives anyway. I don’t like the idea of hoping it all blows over since I could basically be stopped at the USA border at any time and asked why I have not fulfilled my duties as an American citizen.

The really irritating thing is that I’m not completely convinced that anyone will even look at these tax reports. Think of the man hours that the IRS will have to spend sorting out all this paperwork in order to get $0 worth of taxes from almost everyone of us! The whole situation is completely ridiculous when you consider that the big whales they are after almost certainly have the resources to evade capture forever. As usual, government efficiency at its best.


  1. Cancitizen0

    This really is an example of bureaucracy gone amok. I read about this problem before and I was unable to think of any solution.  It really sucks because it actually hurts Canada if some of our citizens have their bank accounts unfairly raided.  It reflects poorly on America…

    • My University Money

      It’s ridiculous in my view that our government is allowing our personal account information to be pilfered.

      • Courtney

        My dad is an American citizen and recently applied to get me a dual citizen ship. Not long after my bank semt me a package asking to confirm if I am American or not. Im not sure if this counts. I was born and currently live in Canada.

  2. Emily Lowes

    The assertion that foreign income by American citizens is subject to double taxation is not correct. The IRS code provides that the taxes paid to a foreign country on income in that country is allowed as a credit on the tax that the US imposes. –

    • My University Money

      Re-read the article Emily, sure EARNED income in foreign countries is good to go (after sheaves of paper), but not investment income etc. Oh, have fund describing a TFSA or RESP on your 1040.

  3. Mary

    Like you, I’m also trying to wade through this and can only imagine the eventual outcome. Why is it that whenever a country finds itself looking for ways to get itself out of the mess that THEY have created, they go after the “little guys“ Ludicrous, is what I think it is and just reminds me more why I cherish living here!

    • My University Money

      Are you looking renouncing your citizenship Mary?

      • Mary

        For one thing, renouncing the citizenship is such a long, drawn-out process, as well as expensive! Plus, my kids and grandbabies are in Kentucky and I’d hate to have to fight just to go visit them. But, I’ll be honest, when all this first started, it certainly crossed my mind.


        • My University Money

          Yes, this is exactly the point I’ve come to as well. I’ve heard that when you renounce they make life miserable for you at the border. It’s also fairly costly to renounce, which seems like a ridiculous onus to but on someone.

          • Mary

            I can only imagine the added cockiness to some of them at the border, thinking “how in the world could someone actually give up being an American??” 🙂 Definitely not something I’d want to go through every time I want to see my grandbabies and I sure can’t expect all to come here to visit me, especially with the kids o young right now. Damned if we do….damned if we don’t…:-)

  4. Guest

    Thanks for sorting this out! I am Canadian, my husband is American, and I do our taxes. I was kind of just ignoring this mess, hoping it would go away… I know he won’t have to pay anything to the IRS, but ugh! The paperwork!

    He’s hesitant about even filing with the IRS for 2011. It was his first year earning income in Canada (I supported him for 3 years while he was waiting to be legally allowed to work here), and he is worried that not filing for those previous years will seem suspicious. But he had no investment income, no property, etc, until 2011. So I think I’m just going to file with IRS for 2011 and hope for the best… Please tell me if this plan is insane!

  5. My University Money

    You’re supposed to file for up to 6 back years. I would probably do all 4 years. The 1040s should be simple, and there will be no need for FBARs or anything. Check out this article in the FP today:

  6. Mary

    There is a whole slew of articles like the one you posted that have been showing up about people renouncing their citizenship. If I didn’t have my grandkids down there, I’m not so sure I wouldn’t! I’ve read with interest the articles as they’ve come out, but have a read through this one…it makes me shake my head at what the U.S. is becoming! I’d love to know your thoughts.

    • TM @ My University Money

      Hey Mary, sorry it took me awhile to respond I don’t track comments too much on this site. Just to keep you updated, I am just waiting a few months to see if there are any problems with people renouncing cross the border. If the border guards are ok, I will probably renounce my citizenship. I’m young, and I hate the idea of paying fees the rest of my life and not being able to use my TFSA!

  7. JC

    Wow, that’s really tax greed. I hold two European citizenships, plus Canadian residency, and none of my two home countries asked for any money since I left Europe. Yes, I had to file taxes the year after I left and paid around 6000 euros to one of the countries, but after that, that’s it. And France never asked for a single cent. And everytime I go down to Seattle I have to pay 6 bucks for the stupid I94, come one, I’m already spending my money in the country, and paying taxes on my shopping, why do I have to pay 6 $ every three months, to finance the paranoid DHS? On the other hand, I like the US and it’s people, but not its government.

  8. Mary

    Hey JC, what is the stupid I94 you mentioned? I’m assuming the paranoid DHS is the Department of Homeland Security? If I’ve had to pay this when I cross at Buffalo, I’m not aware of it. I still have family and friends in the U.S. and I lived there for 42 years but things have gotten so out of hand there over the last few years that I have to wonder what’s going to be the end result there. Thanks for the comment.

    • HeeHaw

      The I94 is a visitor visa.
      Canadian residents already have a standing treaty with the US; this isn’t needed.
      American residents don’t need one to enter their own country.

      Most other countries don’t have these agreements so they need an I94.



    I am from Canada. We recently had an uncle pass away who was a born in the US. He was 90 when he passed and has not been in the US since he was a boy. His estate is now being held up because the US is after there portion. Here is a man that was very organized and thrifty, spent his life saving and investing and has done extremly well for himself. He managed to leave behind an estate that is in the millions. Now the US government is taking a huge portion of this because he had one very small oversight.
    its a shame!!!

    • TM @ My University Money

      Yah I’ve read about this. Really crappy situation to say the least. This is what I want to prevent now by renouncing.

  10. My worst nightmare

    This is my worst nightmare. I’m U.S. citizen landed in Canada, but not Canadian. I moved here with my parents while still a minor. I’ve had no income in at least 15 years, but I do have some spousal RRSP’s. I will have a portion of my husband’s pension if he passes before me. From my understanding I will not get Old Age pension because I’m not Canadian. I will have a bit of Canada Pension from the few years I worked (22yrs) buy my wages were abysmal so my cpp will be very small. I’m 61 now, and I’m scared to death at what my financial situation will be in the future. Seeing that I can not afford to pay any tax professional, or lawyer to help me with this mess… well let’s just say I can’t deal with this. I also have a sister who’s in the same situation. My brother moved back to the USA, we don’t have that option. I also hear that my husband is supposed to file some U.S. tax forms. What is that all about???
    One of my brother’s son’s moved back to Canada. He was born here, and my brother took out US citizenship for all his children. My nephew is disabled, (mental illness) newly married with a son. I am his payee, and do his taxes. His wife prefers me to handle his financial affairs. I’d rather not do it, but they are not capable. They need more help than I can give them… I don’t know where to turn for myself or my family. We are all low income. My nephew could be getting more disability because he’s married and now has a son, but he won’t go across the border to social security with me, because he was stripped searched and his fear of that border exceeds the need for more income.
    So… yes I want to bury my head in the sand and hope it all just goes away.

    • HeeHaw

      Hi Worst Nightmare,
      I can’t even start to reply till you peel apart your letter into some simple questions that people can start to answer simply. This isn’t a professional board – people have their own stuff to do, so make it easy on us. We’re happpy to answer a question or few, but make them questions rather than something that sounds like “AAAAAA!!!!”

  11. Onfoot

    My wife and I could have written Teacher Man’s article–it reflects exactly our own learning and experience. Though we do our own Canadian taxes, we decided we would bite the bullet and contract with one of the expat tax outfits that specialize in helping USA citizens caught in this ridiculous situation. So we are now ‘caught up.’

    But–and here is the real kicker–not only did we not owe any taxes, we actually received a total of US$1500 back from the IRS as part of Obama’s economic stimulus program! So far from paying down the USA deficit, we did our bit to add to it! Go figure!

  12. Debra

    I am a Canadian and have my green card to live in the USA. I’ve been in the USA since 1985 and now will be moving back to Canada this year. I was actually thinking of applying for my dual citizenship, but after reading all these posts, I have doubts. Not sure what to do now??? 🙂

  13. Brie

    I moved to Canada from the U.S. in May 2014. I thought that after all my research about moving over (I’m a dual citizen), that I would not have to file American taxes! I’m upset that I didn’t seem to understand what I was reading properly! I’m now rethinking getting my son (born in Canada in 2014) dual citizenship.

    So my questions: When I was living in the U.S., my uncle did my taxes for me (he uses Turbo Tax). Next year, when I file my 2015 taxes, is he capable of filing my American taxes still? I’m not sure if this has to be done in Canada or not, or if he will even know what forms to get, since doing taxes is kind of just a side job for him. I’m low income and really can’t afford to pay someone to file them!

    I looked up what a TFSA is and I also saw in the comments that someone mentioned not being able to use their TFSA because they have to file American taxes as well. I’m not sure I completely understand this! If I open a TFSA, I wouldn’t be able to use it because I’m a dual citizen?

  14. The Little Guy

    Any idea how this affects beneficiaries from estates? There’s no inheritance tax in Canada. Do they really expect to take a piece of that pie? Or maybe that’s what they’re really going after?

  15. Scott

    I went through this process a number of years ago. Initially, I involved a tax professional to get me going and now I simply file my US taxes using US Turbotax. My initial filing was 3 years of returns and cost me about $1500. I then paid about $450 per year for a couple more years and then switched to turbotax and do it myself at about $30-$50 per year depending on the exchange rate.

    The main ingredients here are filling out the proper forms, reporting your RRSP’s and bank accounts (and life insurance with cash values!) via the FBAR system ( now online via FinCEN ).

    It is pretty painless for me now. There are gotcha’s though depending on if your spouse is also a US Citizen or not. Mine is not. She is Canadian. I file Married, filing separately. She does not file US forms at all.

    I would recommend involving a professional for the first go-round as there are some elections you can take that are permanent (if you make a wrong election you are messed up).

    Now that I am doing this every year, it is more of a pain then anything else and nothing much will change now until I die and/or sell my home. Because my wife is not a US Citizen, everything that is joint is considered 50/50 so when the house is sold, it is only 50% mine and any capital gains over $250,000 will be based on my 50% so I likely will be exempt.

    Now then, if I win Lotto 649 or LottoMax, I will no longer have to worry about much, except of course figuring out if the US taxes Canadian lottery winnings…I have no idea!

  16. Bycatch

    I am part of the bycatch whilst trying to get those big whales. I just started my working life at near 30 with about $400 in a regular savings account. My father has years of back taxes to report so at least I am in a slightly better situation than him and know what the obligations are going forward. The biggest question for me is what should I do with my savings (hopefully they will start to accumulate soon) while working in Canada. I know that TFSAs are out. So I figure open an RRSP?? but then my family accountant says don’t worry about that now just wait until you know where you will be living for the next two years. Is that not part of being a dual citizen? Freedom to say I can take a job in either country at any time??? I am really beginning to think my best option may be to squirrel away Canadian savings until exchange rate is favourable, convert to USD and invest in indexed mutual funds. I would rather invest my money in a Canada *cough* a reasonable country *cough* I just feel that it doesn’t make sense long term if you are also a US citizen. Or rather it is not worth the filing headache. I totally agree with your statement about the futility of all of this. It has been nearly half a decade that my family has been trying utmost to get compliant. To date we have heard basically radio silence from the IRS. In fact they recently asked us to resend documents from 2011. It really makes you want to just bury your head in the sand.

  17. Prudence Kaufman

    I have a question. I am a Canadian citizen who was married to an American. We are now divorced and I returned to Canada with our 4 kids. I have full custody. When do my American born children have to start filing? They are 13 and under?

  18. Frustrated Canadian

    Well, I am in the middle of this mess right now. One of my parents was born in the US and I was made a dual citizen at birth (my parent filed for it).
    I recently used a firm to sort out the last six years and I actually OWED taxes because the US taxes CDN scholarships. Ridiculous. So yeah, I’m one of those minnows caught in the net meant for whales and I am so frustrated.
    What is really worrisome is that I was going to renounce, but found that it is over $3000 CDN to do so, and includes tons of forms and an interview at the embassy. Grrrrr.

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