US citizens in Canada – time to file your late tax returns
Thanks to consistent media attention over the last few years many if not most US citizens living in Canada have become aware of the requirement to maintain their US tax filings as a US citizen.
Unlike Canada’s residency tax system, the US taxes individuals based on citizenship regardless of whether they are residents of the US or not. Therefore US citizens living abroad are subject to the same tax filing requirements as domestic residents. This doesn’t mean however that these individuals will be subject to double taxation. For example, the application of the Canada-US tax treaty will alleviate most of the double taxation that would occur between the two countries when someone files as a dual resident.
I’m a US citizen living in Canada and I haven’t been filing US taxes, what should I do?
In the past, US taxpayers living abroad had little guidance from the IRS on how to catch up their late tax returns. The offshore voluntary disclosure program (2009, 2011 and 2012) was always available, however this program was traditionally meant for those that needed to amend originally filed returns for investment income not originally reported and to disclose foreign accounts held in foreign countries outside of their primary residence.
Some good news was announced in June of 2012 when the IRS issued a press release stating that a new program would be rolled out to help delinquent US taxpayers abroad to catch up their late returns if they met certain criteria. In September of 2012 the IRS issued the final guidance for their Streamlined Tax Filing Program which allows US citizens abroad the ability to file late US tax returns in a manner much more simplified than in previous years.
How do I qualify for the new streamlined tax filing program?
In order to qualify under the new streamlined tax filing program an individual must haveresided outside of the US since January 1, 2009 and have not filed a US tax return during this period. They must also present a “low level” of compliance risk. Low level compliance as determined by the IRS will include tax returns with no more than $1,500 of tax owing in any particular year.
Other factors which may increase risk include:
- Tax returns claiming refunds
- Individuals with material business activities in the US and/or US source income
- Non compliant domestic returns
- The IRS has already contacted the taxpayer with respect to their tax returns or FBAR forms (TDF 90-22.1 forms)
- Taxpayers with financial assets outside of their country of residence
- Taxpayers with complex tax structures
Note that the streamlined tax filing program is currently applicable to 2009, 2010 and 2011 tax years. Once the 2012 US tax deadlines passes the streamlined program is expected to include 2010, 2011 and 2012. This is anticipated by many tax practitioners however no formal guidance has been issued by the IRS on whether 2012 will be included in the new streamlined program in 2013.
Procedures for filing under the streamlined tax filing program
- Prepare 1040 income tax returns for 2009, 2010 and 2011 including any necessary forms and/or schedules
- Prepare 2006 to 2011 FBAR forms (if applicable)
- Complete the Streamlined Tax Questionnaire
- Submit all of the above the IRS including any required payment for tax and/or penalties and interest.
Those that are considering filing under the new program are cautioned to ensure they fully understand all the required forms, schedules and calculations that may be required under US law. This is especially important considering the complexity of cross border tax issues with respect to income and how it relates to the Canada-US income tax treaty. US citizens living in Canada should consider the implications of the following items:
- Foreign “trust” filing requirements for TFSA and RESP accounts via form 3520 and 3520-A
- Form 5471 for those that own more than 10% of private Canadian corporations
- Form 8938 – Statement of Specific Foreign Financial Assets
- Tax implications for taxpayers owning Canadian mutual funds. They are considered Passive Foreign Investment Companies
- Required treaty elections
For those US citizens that are eligible and have yet to file their delinquent US tax returns the current program offers a far superior alternative to the 2009 – 2012 OVDI programs. As new foreign tax compliance initiatives such as the 2014 Foreign Account Tax Compliance Act (FATCA) roll out it will be more important then ever to become voluntarily compliance before the IRS starts requesting tax returns from unsuspecting Canadian residents.