US Citizens residing in Canada

1. Presentation to RBC Canada
May 31st, 2012
Presented by:
Mathieu Ouellette, CA, LL.M. Fisc.

2. U.S. CITIZENS RESIDING IN CANADA
1- U.S. CITIZENSHIP
• THERE ARE TWO PRIMARY SOURCES OF CITIZENSHIP:
• BIRTHRIGHT CITIZENSHIP - IN WHICH A PERSON IS PRESUMED TO BE A CITIZEN,
PROVIDED THAT HE OR SHE IS BORN WITHIN THE TERRITORIAL LIMITS OF THE
UNITED STATES, AND;
• NATURALIZATION - A PROCESS IN WHICH AN IMMIGRANT APPLIES FOR
CITIZENSHIP AND IS ACCEPTED.
2

3. U.S. CITIZENS RESIDING IN CANADA
2 - U.S. INCOME TAX RETURN FILING REQUIREMENTS
• U.S. CITIZENS ARE REQUIRED TO REPORT WORLDWIDE INCOME ON
THE FEDERAL INCOME TAX RETURN. ALL INCOME MUST BE REPORTED
REGARDLESS OF WHICH COUNTRY IS THE SOURCE OF THE INCOME.
• FAILURE TO FILE AN INCOME TAX RETURN RESULTS IN PENALTIES IF THERE ARE
TAXES DUE. THE PENALTY IS 5% OF THE TAXES OWING. AN ADDITIONAL 5%
PENALTY MAY BE IMPOSED FOR EACH MONTH DURING WHICH THE FAILURE
CONTINUES.
• OTHER PENALTIES AND INTEREST MAY ALSO APPLY.
3

4. U.S. CITIZENS RESIDING IN CANADA
3 – FBAR FILING REQUIREMENTS
• U.S. CITIZENS ARE REQUIRED TO REPORT THEIR INTEREST IN CERTAIN FOREIGN
FINANCIAL ACCOUNTS (FBAR).
• A U.S. PERSON THAT HAS A FINANCIAL INTEREST IN OR SIGNATURE AUTHORITY
OVER FOREIGN BANK ACCOUNTS MUST FILE AN FBAR IF THE AGGREGATE VALUE OF
THE FOREIGN FINANCIAL ACCOUNTS EXCEEDS $10,000 AT ANY TIME DURING THE
CALENDAR YEAR.
• CIVIL PENALTIES FOR WILLFULLY FAILING TO FILE AN FBAR CAN BE UP TO THE
GREATER OF $100,000 OR 50% OF THE TOTAL BALANCE OF THE FOREIGN ACCOUNT
AT THE TIME OF VIOLATION.
• NON-WILLFUL VIOLATIONS THAT THE IRS DETERMINES ARE NOT DUE TO
REASONABLE CAUSE ARE SUBJECT TO A PENALTY OF UP TO $10,000 PER
VIOLATION.
• THERE IS NO PENALTY IN THE CASE OF A VIOLATION THAT IRS DETERMINES WAS
DUE TO REASONABLE CAUSE.
4

5. U.S. CITIZENS RESIDING IN CANADA
4 – OTHER FOREIGN REPORTING REQUIREMENTS
• OTHER TAX FILINGS TO DISCLOSE FOREIGN ASSETS MAY APPLY SUCH AS FORM 3520
“ANNUAL RETURN TO REPORT TRANSACTIONS WITH FOREIGN TRUSTS” AND FORM
8938 “STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS”.
5

6. U.S. CITIZENS RESIDING IN CANADA
5 – CONCEPT OF RESIDENCE IN CANADA
• THE RESIDENTIAL TIES AN INDIVIDUAL HAS ESTABLISHED IN CANADA ARE A MAJOR
FACTOR IN DETERMINING RESIDENCE STATUS.
• RESIDENTIAL TIES TO CANADA INCLUDE:
PRIMARY TIES
A HOME IN CANADA;
A SPOUSE OR COMMON-LAW PARTNER OR DEPENDANTS IN CANADA;
6

7. U.S. CITIZENS RESIDING IN CANADA
5 – CONCEPT OF RESIDENCE IN CANADA (CONT’D)
SECONDARY TIES
PERSONAL PROPERTY IN CANADA, SUCH AS A CAR OR FURNITURE;
SOCIAL TIES IN CANADA;
ECONOMIC TIES IN CANADA;
A CANADIAN DRIVER’S LICENCE;
CANADIAN BANK ACCOUNTS OR CREDIT CARDS; AND
HEALTH INSURANCE WITH A CANADIAN PROVINCE OR TERRITORY.
7

8. U.S. CITIZENS RESIDING IN CANADA
5 – CONCEPT OF RESIDENCE IN CANADA (CONT’D)
SOJOURNING RULES
• AN INDIVIDUAL WILL BE CONSIDERED A DEEMED RESIDENT OF CANADA IF HE
STAYED IN CANADA FOR 183 DAYS OR MORE IN A CALENDAR YEAR.
8

9. U.S. CITIZENS RESIDING IN CANADA
6 – CONCEPT OF RESIDENCE AND THE CANADA-U.S. TAX TREATY
• GENERALLY, THE “TIE-BREAKER” RULES SET FORTH IN ARTICLE IV(2) OF THE
CANADA-U.S. TAX TREATY APPLY TO DETERMINE THE STATE OF RESIDENCE OF A
PERSON WHO WOULD OTHERWISE BE CONSIDERED RESIDENT OF CANADA AND
THE UNITED STATES.
• THE “TIE-BREAKER” RULES GENERALLY PREVENT AN INDIVIDUAL FROM BEING
SUBJECT TO TAX ON WORLDWIDE INCOME IN BOTH COUNTRIES.
9

10. U.S. CITIZENS RESIDING IN CANADA
6 – CONCEPT OF RESIDENCE AND THE CANADA-U.S. TAX TREATY
• THE “TIE BREAKER RULES” – ARTICLE IV(2)
WHERE BY REASON OF THE PROVISIONS OF PARAGRAPH 1 AN INDIVIDUAL IS A
RESIDENT OF BOTH CONTRACTING STATES, THEN HIS STATUS SHALL BE
DETERMINED AS FOLLOWS:
A. HE SHALL BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE IN WHICH
HE HAS A PERMANENT HOME AVAILABLE TO HIM; IF HE HAS A PERMANENT HOME
AVAILABLE TO HIM IN BOTH STATES OR IN NEITHER STATE, HE SHALL BE DEEMED TO
BE A RESIDENT OF THE CONTRACTING STATE WITH WHICH HIS PERSONAL AND
ECONOMIC RELATIONS ARE CLOSER (CENTRE OF VITAL INTERESTS);
B. IF THE CONTRACTING STATE IN WHICH HE HAS HIS CENTRE OF VITAL INTERESTS
CANNOT BE DETERMINED, HE SHALL BE DEEMED TO BE A RESIDENT OF THE
CONTRACTING STATE IN WHICH HE HAS AN HABITUAL ABODE;
10

11. U.S. CITIZENS RESIDING IN CANADA
6 – CONCEPT OF RESIDENCE AND THE CANADA-U.S. TAX TREATY (CONT’D)
C. IF HE HAS AN HABITUAL ABODE IN BOTH STATES OR IN NEITHER STATE, HE SHALL
BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE OF WHICH HE IS A
CITIZEN; AND
D. IF HE IS A CITIZEN OF BOTH STATES OR OF NEITHER OF THEM, THE COMPETENT
AUTHORITIES OF THE CONTRACTING STATES SHALL SETTLE THE QUESTION BY
MUTUAL AGREEMENT.
11

12. U.S. CITIZENS RESIDING IN CANADA
6 – CONCEPT OF RESIDENCE AND THE CANADA-U.S. TAX TREATY
• THE “TIE-BREAKER” RULES GENERALLY PREVENT AN INDIVIDUAL FROM BEING
SUBJECT TO TAX ON WORLDWIDE INCOME IN BOTH COUNTRIES.
• HOWEVER, THE “TIES BREAKER” RULES DO NOT APPLY TO U.S. CITIZENS BY VIRTUE
OF THE “SAVING CLAUSE” UNDER ARTICLE XXIX(2)(a) OF THE TREATY.
• THIS LEADS TO THE SITUATION WHERE A U.S. CITIZEN WHO IS CONSIDERED TO BE A
RESIDENT OF CANADA FOR TAX PURPOSES MUST REPORT WORLWIDE INCOME IN
BOTH COUNTRIES.
12

13. U.S. CITIZENS RESIDING IN CANADA
7 – FOREIGN TAX CREDIT TO PREVENT DOUBLE TAXATION
• TO PROVIDE RELIEF FROM DOUBLE TAXATION, ONE OF THE TWO COUNTRIES WILL
GENERALLY GRANT A FOREIGN TAX CREDIT FOR THE TAXES PAID IN THE OTHER
COUNTRY ON A SPECIFIC TYPE OF INCOME.
• WHICH ONE OF THE TWO COUNTRIES WILL GRANT THE FOREIGN TAX CREDIT
DEPENDS ON THE “SOURCE” OF THE INCOME.
• CANADA WILL GRANT A FOREIGN TAX CREDIT FOR U.S. TAXES PAID ON U.S. SOURCE
INCOME PURSUANT TO ARTICLE XXIV(4)(a) OF THE TREATY.
• U.S. WILL GRANT A FOREIGN TAX CREDIT FOR THE CANADIAN TAXES PAID ON
CANADIAN SOURCE INCOME PURSUANT TO ARTICLE XXIV(4)(b) OF THE TREATY.
13

14. U.S. CITIZENS RESIDING IN CANADA
8 – SOURCING AND RE-SOURCING OF INCOME
• DETERMINING THE SOURCE OF AN INCOME STREAM IS NOT ALWAYS INTUITIVE.
CERTAIN TYPES OF INCOME SUCH AS DIVIDENDS AND PENSION INCOME ARE
INITIALLY SOURCED AS ARISING IN A COUNTRY AND THEN RE-SOURCED TO THE
OTHER COUNTRY.
EXAMPLES:
• INTEREST ARISING IN THE U.S. (TREASURY BILLS, U.S. BONDS ETC.)
SOURCED AS CANADIAN INCOME – U.S. WILL GRANT THE FTC – PURSUANT TO
ARTICLES XI(1), XXIV(3)(a), XXIV(4)(a) AND XXIV(5)(b) OF THE TREATY.
14

15. U.S. CITIZENS RESIDING IN CANADA
8 – SOURCING AND RE-SOURCING OF INCOME (CONT’D)
• DIVIDENDS ARISING IN THE U.S. (DIVIDENDS PAID BY U.S. CORPORATIONS)
SOURCED AS ARISING IN THE U.S. TO ALLOW CANADA TO GRANT A FTC OF UP TO
15% IN RESPECT OF TAXES PAID IN THE U.S. PURSUANT TO ARTICLE X(2)(b),
XXIV(3)(a), XXIV(4)(a) AND XXIV(5)(b) OF THE TREATY.
EXCESS OVER 15% IS RE-SOURCED AS INCOME ARISING IN CANADA TO THE EXTENT
NECESSARY TO AVOID DOUBLE TAXATION. THIS ALLOWS THE U.S. TO GRANT A FTC
FOR A PORTION OF THE TAXES PAID IN CANADA ON THE DIVIDENDS PURSUANT TO
ARTICLE XXIV(4)(b) AND XXIV(6) OF THE TREATY.
15

16. U.S. CITIZENS RESIDING IN CANADA
8 – SOURCING AND RE-SOURCING OF INCOME (CONT’D)
• CAPITAL GAIN ARISING ON THE SALE OF U.S. PORTFOLIO SECURITIES
SOURCED AS CANADIAN INCOME – U.S. WILL GRANT THE FTC PURSUANT TO
ARTICLES XIII, XXIV(3)(a), XXIV(4)(a) AND XXIV(5)(b) OF THE TREATY.
• PENSION INCOME ARISING IN THE U.S.
SOURCED AS ARISING IN THE U.S. TO ALLOW CANADA TO GRANT A FTC OF UP TO
15% IN RESPECT OF TAXES PAID IN THE U.S. PURSUANT TO ARTICLE XVIII(2),
XXIV(3)(a) AND XXIV(4)(a) OF THE TREATY.
EXCESS OVER 15% IS RE-SOURCED AS INCOME ARISING IN CANADA TO THE EXTENT
NECESSARY TO AVOID DOUBLE TAXATION. THIS ALLOWS THE U.S. TO GRANT A FTC
FOR A PORTION OF THE TAXES PAID IN CANADA ON THE PENSION INCOME
PURSUANT TO ARTICLE XXIV(4)(b) OF THE TREATY.
16

17. U.S. CITIZENS RESIDING IN CANADA
9 – PARTICULAR SITUATIONS
• TFSA
A TFSA HAS NO SPECIAL STATUS UNDER THE INTERNAL REVENUE CODE AND THERE
ARE NO RELIEVING PROVISIONS CONTAINED IN THE TREATY TO SHELTER TFSA
EARNINGS FROM TAXATION IN THE U.S. AS SUCH, U.S. TAXPAYERS ARE TAXABLE ON
ANY INCOME EARNED IN A TFSA ON A CURRENT YEAR BASIS.
THE IRS MAY CONSIDER TFSAs TO BE FOREIGN TRUSTS. IF A TAXPAYER IS AN OWNER
OF A NON-RESIDENT TRUST, FORM 3520-A “ANNUAL INFORMATION RETURN OF
FOREIGN TRUST WITH A U.S. OWNER” IS REQUIRED TO BE FILED. TO DATE THERE
HAS BEEN NO OFFICIAL IRS POSITION ON WHETHER THESE FORMS ARE REQUIRED
FOR TFSA HOLDERS.
17

18. U.S. CITIZENS RESIDING IN CANADA
9 – PARTICULAR SITUATIONS
• RESP
AN RESP HAS NO SPECIAL STATUS UNDER THE INTERNAL REVENUE CODE AND
THERE ARE NO RELIEVING PROVISIONS CONTAINED IN THE TREATY TO SHELTER
RESP EARNINGS (INCLUDING CANADIAN EDUCATION SAVINGS GRANTS) FINANCIAL
ASSISTANCE) FROM TAXATION IN THE U.S. AS SUCH, INCOME EARNED WITHIN THE
PLAN IS TAXABLE ON A CURRENT YEAR BASIS.
WITHDAWAL OF EARNINGS AND GOVERNMENT ASSISTANCE BY THE STUDENT MAY
RESULT IN DOUBLE-TAXATION.
18