Tuesday, 5 July 2016

Complications of US and Canadian Tax Laws

The United States and Canada each has very distinctive systems of taxation. This called for both countries to sign the Tax Treaty. The rules on cross-border taxation between the two nations are covered in Article XXIV of the US – Canada Income Tax Convention, 1980 (Treaty). This treaty ensure residents of each country is not taxed by each of the two countries on the same income in the same year. However, residents from both countries are faced with challenges determining the US and Canadian tax laws. Filing US taxes in Canada is no easy task.

Cross Border Tax Specialist
  • Tax obligations
        The US Foreign Account Tax Compliance (FATCA) has become part of the 2014 federal budget and recently became Canadian Law. FATCA requires Canadian financial establishments to send information of their US account holders to the Canada Revenue Agency, which in turn, will send the data to the Internal Revenue Services (IRS). Overdue tax returns should be a priority to avoid penalties and the IRS chasing you.
  • Dual Citizenship and Taxes
         Obligations of Canadian taxation are based on residency status. Canada Revenue Agency (CRA) have guidelines and interpretations on the subject. The CRA reviews information on your residential ties to Canada, your place of residency, length of stay in Canada and a number of other factors to make its summary. Based on that result, you could be taxed or not.

         Complications usually arise if you are a citizen of another country, like the U.S., and classified as a Canadian resident or with dual Canadian citizenship. They are taxed based on their worldwide income regardless of their country of residency. But because of the tax treaty, residents of both countries get provisions and relief so they pay in one country and receive credit in the other for the taxes paid.
  • Investments
         Many Canadian residents have been investing in Registered Education Saving Plans (RESPs) and Tax Free Savings Account (TFSAs). These investments are tax-free that grow within their accounts. This result in complications for Canadian residents who are also U.S. Citizens. These investments can be costly for U.S. tax purposes and do not provide the tax benefits under U.S. tax rules that do under Canadian tax rules. They do not get special treatment under U.S. domestic tax law or under the Canada – U.S. Income Tax Convention, which is why, the income generated by these accounts is taxable to the investor.

Another complication is that IRS considers RESPs to be foreign trusts, which means individuals must need to file IRS Forms 3520 and 3520A on an annual basis. Foreign trusts returns are complicated to prepare and compliance to these can become very costly.

Paying US taxes in Canada, despite complications, can be very beneficial. It actually guarantee you a good record of paying your taxes. US taxes in Canada, in addition, are protected by the rules of the treaty so it doesn’t have to be too difficult. For those with financial circumstances like filing taxes in Canada, there are quite a number of distinguished cross-border tax team who specializes in these scenarios.


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