EXPats Tax Returns

US EXPATS Tax Returns in Canada

INCOME TAX OBLIGATIONS FOR AMERICANS LIVING IN CANADA


As a U.S. citizen or green card holder residing abroad, you have to file a U.S. tax return on your worldwide income.  IRC §61 indicates “except as otherwise provided in this subtitle gross income means all income from whatever source derived".  In another words, all income, including worldwide income”   As a U.S. citizen/green card holder residing abroad, you still owe U.S. taxes each year on your income earned in the US and worldwide. There are also certain exclusions you can utilize under the Canada U.S. Income Tax Convention (Treaty) to reduce the effect of double taxation of living abroad.

You maybe also required to file an FBAR form, FinCEN Report 114, Report of Foreign Bank and Financial Accounts.

Call us and let us help you comply with the US tax law.

Tax Position of U.S. Citizens Residing Overseas


The IRS applies taxation rules on the basis of the taxpayer citizenship or nationality and not on the basis of their residence. US expatriates who meet certain tests, such as Physical Presence test or the Bona Fide Residence Test may be able to take advantage of the Foreign Earned Income Exclusion and Foreign Tax Credits.


Physical Presence: The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning to the United States, or the nature and purpose of your stay abroad. However, your intentions with regard to the nature and purpose of your stay abroad are relevant in determining whether you meet the tax home test explained under Publication 54 Tax Guide for US Citizens and Resident Aliens Abroad.

Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during the 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time. The physical presence test applies to both U.S. citizens and resident aliens.


Bona Fide Residence: You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction only if you are either:

  • A U.S. citizen, or
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.

You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.

The bona fide residence test applies to U.S. citizens and to any U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty (United States – Canada

Income Tax Convention) in effect. To see if you meet the test of bona fide residence in a foreign country, you must find out if you have established such a residence in a foreign country. Your bona fide residence is not necessarily the same as your domicile. Your domicile is your permanent home, the place to which you always return or intend to return.

Questions of bona fide residence are determined on a case-by-case basis, taking into account such factors as your intention or the purpose of your trip and the nature and length of your stay abroad. You must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. The IRS decides whether you qualify as a bona fide resident of a foreign country largely on the basis of facts.

US citizens and resident aliens who are outside the United States (and its possessions) have the same requirements to file tax returns as anyone living in the United States. Income from worldwide sources must be considered when determining if a federal tax return must be filed. In general, foreign earned income is income received for services performed in a foreign country.

If you pay foreign taxes, it may be possible to offset these against US taxes if there is a double tax treaty with the country in which you are resident. The concept of 'tax home' is used in connection with foreign residence. Generally, a persons tax home is the general area of her main place of business, employment, or post of duty where she is permanently or indefinitely engaged to work. A person is not considered to have a tax home in a foreign country for any period during which their abode (the place where they regularly live) is in the United States.


Foreign Earned Income Exclusion

Qualified individuals may elect to exclude up to $99,200 (for 2014) of foreign earned income from taxable income.  If both spouses work in a foreign country and meet the qualifications for the exclusion, up to $198,400 of foreign earned income can be excluded in 2014.

Who qualifies?

An individual generally qualifies for the foreign earned income exclusion if his tax home is in a foreign country and one of the following tests is met.  The Physical Presence test or the Bona Fide Residence test mentioned and described above.


Foreign income includes:

  • Salaries, wages, etc.
  • Allowances for housing and other expenses.
  • Business profits, royalties or rents tied to performance of services.
  • Value of fringe benefits.
  • Non cash income, such as market value of property or facilities furnished by employer.


Foreign earned income does not include:

  • Pensions or annuities, including Social Security.
  • Amounts paid to an employee of the US government or agency by a government employer (including military personnel).
  • Dividends, interest, capital gains.
  • Certain trust benefits.
  • Gambling winnings.
  • Alimony.
  • Amounts received for services more than one year after the tax year in which the services were performed.
  • Income earned in Countries to which travel is restricted by the US government.


Housing Costs—Exclusion or Deduction

In addition to the foreign earned income exclusion, qualified individuals can also elect to claim an exclusion or deduction for a housing cost amount. 


Foreign Tax Credits

Taxpayers may choose to either claim a foreign tax credit or a tax deduction on Schedule A (Form A) for taxes paid to a foreign government or US possession on income that is also subject to US income tax.  Taxpayers cannot claim both the credit and the deduction for the same foreign tax, but a Schedule A deduction is allowed for certain taxes that do not qualify for the foreign tax credit. It is often optimal to claim a credit for foreign taxes rather than to deduct them. Whereas a credit reduces US tax liability, with any excess able to be carried back and carried forward to other years, a deduction reduces taxable income and may be taken only in the current year.

The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.


The tax must meet four tests to qualify for the credit:

  • The tax must be a legal and actual foreign tax liability
  • The tax must be imposed on you
  • You must have paid or accrued the tax, and
  • The tax must be an income tax (or a tax in lieu of an income tax)

Generally, only income taxes paid or accrued to a foreign country or a U.S. possession (also referred to as a U.S. territory), or taxes paid or accrued to a foreign country or U.S. possession in lieu of an income tax, will qualify for the foreign tax credit.


Foreign Taxes that do not qualify for the credit include:

  • Taxes attributable to excluded income (Foreign earned income exclusion described above).
  • Taxes attributable to foreign countries designated by the Secretary of State as countries (1) involved with international terrorism, (2) that have no diplomatic relations with the US or (3) whose governments are not recognized by the US.
  • Taxes that would be refunded if the taxpayer made a claim.
  • Taxes that are returned to the taxpayer as a subsidy.
  • Withholding tax paid on foreign-source dividends if stock from the foreign corporation has not been held at least 16 days.

There is a limit to the Foreign tax credit.  Generally, the foreign tax credit is limited to US tax multiplied by the ratio of foreign taxable income to total taxable income.  This amount is computed on Form 1116.  The foreign tax credit limit does not apply to taxpayers who elect to claim the foreign tax credit without filing Form 1116.


Election not to file Form 1116:

  • Taxpayers can claim the foreign tax credit on Form 1040 without filing Form 1116 if:
  • Total foreign tax paid or accrued during the year do not exceed $300 ($600 MFJ).
  • All foreign income is passive income (such as dividends, interest, annuities and rents or royalties not from an active trade or business) and is report on Form 1099-DIV, 1099-INT, Schedule K-1 or other similar statement.
  • For dividend income, the shares were held for at least 16 days.
  • The taxpayer is not filing Form 4563 or excluding income from sources within Puerto Rico.
  • All foreign taxes were legally owed, not eligible for a refund and paid to countries that are recognized by the US and do not support terrorism.


Obamacare (ACA) and the US Expat

The basic premise of Obamacare is that Americans have a shared responsibility to ensure health care coverage for everyone. Every US resident must obtain minimum health care coverage or be subject to additional taxes (which help support the program's ability to provide coverage for those individuals who cannot afford it on their own).

Since US expats aren't generally residents of the US while living overseas, the majority of expats will be exempt from the Obamacare health insurance requirements. But in order to be exempt you must prove residency in another country through one of two tests:

  • The Bona Fide Residence Test- To qualify through this test you must have been living abroad for at least one year and have no immediate plans to return to the US.
  • The Physical Presence Test- Most expats will qualify for this test, as you simply need to have foreign earned income and be physically out of the US for 330 days out of a 365 day period.

Once you qualify for foreign residency, you are said to have the ‘minimum essential coverage' and are not required to purchase any additional coverage. Whether or not you hold coverage in your current country of residence or through a US expatriate plan is irrelevant—you are still considered to be exempt from Obamacare by simply qualifying as a resident of another country.


Due Date of Tax Return

If you have your personal permanent residence abroad on April 15th of any year, you get an automatic extension to file your tax return for the previous calendar year until June 15th. If you need more time, you can file further extension requests which can extend the due date of your tax return until October 15th. If you owe taxes, and fail to pay the estimated taxes by April 15th, you will be subject to interest and penalties for that underpayment. However, those penalties are not as severe as those imposed for failing to file your tax return in a timely manner. It is therefore advisable to always file an extension if you are going to file your return later than April 15th, even if you do not have the money to pay your estimated taxes at the time.



Avoiding Penalty and Interest on Tax Due


Even if you file an extension to October 15th, instead of April 15th, to file your US Income Tax Return, be aware that interest and underpayment penalty are charged as of April 15th. Further, the IRS can assess underpayment penalty (and interest) if the tax due is paid by April 15th, but no (or insufficient) estimated tax payments or withholding were made prior to paying the balance due on April 15th. This is because tax law requires sufficient regular payment or withholding (or combination) to be done through out the tax year in order to avoid ALL underpayment penalties.


FBAR form, FinCEN Report 114, Report of Foreign Bank and Financial Accounts.

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR). See the ‘Who Must File an FBAR’ section below for additional criteria.


Who Must File an FBAR form?

United States persons are required to file an FBAR if:

The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and

The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s  BSA E-Filing System.  The FBAR is not filed with a federal tax return. When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. There is no provision for requesting an extension of time to file an FBAR.

Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation. For guidance on circumstances including natural disasters that prevent timely filing of an FBAR, see FIN-2013-G002 (June 24, 2013).


Income Tax Treaties


CANADA US INCOME TAX CONVENTION

The major purpose of an income tax treaty is to mitigate international double taxation through tax reductions and exemptions for certain types of income derived by residents of one treaty country from sources within the other treaty country.

The Canada U.S. Income Tax Convention (Treaty) currently in force was first established in 1980, and since that time there have been five major alterations, or "protocols" adopted at various times. The latest, Fifth Protocol, contains some major changes, which could change the way in which tax law is interpreted in Canada and the United States. The Fifth Protocol, unless otherwise stated, is effective on January 1, 2008.

The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. The treaty or its provisions does not result in an exemption from filing an US income tax return. Failure to file US income tax forms and elections in an accurate and prescribed manner and on a timely basis may result in a denial of the exemption being sought (therefore possibly resulting in double taxation if the person is also taxable in Canada), denial of otherwise deductible expenses, interest, and penalties for inaccurate, incomplete or non-filed forms or returns.

Get Professional Cross Border Tax Help in Vancouver Canada

US Tax Professionals specialize in cross the border taxes and we can help you:

File the necessary tax returns to keep you current with the IRS.

Maximize the benefits of claiming the foreign earned income exclusion and foreign tax credits.

Claim the treaty exemptions and benefits applicable to your tax situation

Complete the disclosures required to defer income earned within RRSP accounts

File the required FBAR form, FinCEN Report 114, Report of Foreign Bank and Financial Accounts.

Contact our US Tax Accountant today!