Tax Alerts

Tax Considerations for US Citizens in Canada

There are many differences between the Canadian and U.S. tax systems, which complicate tax planning, especially for the U.S. citizen living in Canada.  In preparation of the oncoming tax season, I’ve outlined the most common differences noted in our tax practice:

Many Canadian citizens, including dual citizens, incorporate themselves for the tax advantages of tax deferral, whether it is for the purpose of tax savings at present or savings for retirement.   In general, the corporate tax rate in Canada is lower than in the US.  While this structure works great for Canadian citizens and residents, it creates many headaches for the U.S. citizen.  This tax deferral is generally disallowed through the controlled foreign corporation and passive foreign investment company rules that apply to U.S. persons.  Further, this creates exposure to double taxation through differences in timing of taxation for both countries.

Mutual funds are a great tax planning mechanism for many Canadians.  They allow us to diversify our stock holdings and mitigate our associated risk.  The IRS views these investments as individual passive foreign investment companies.  Accordingly, special rules apply to the U.S. citizen or resident who holds stocks in Canadian mutual funds.  Further, the differing tax systems expose the U.S. person to double taxation in addition to the onerous annual reporting requirements.

Certain savings vehicles, including RESPs for planning for a child’s future post-secondary education, and TFSAs  are not recognized under the Canada-US tax treaty. The U.S. tax system treats these vehicles as grantor trusts.  As such, the income growth is not tax-free nor are the government contributions.  Further, these are reported on additional tax forms that are filed annually with the IRS and are subject to significant penalties if they are not filed in a timely manner.

Selling our principal home is a common occurrence for many Canadian who will move a number of times in their lives to accommodate changes in the family needs: both to increase square footage for newborn children or to downsize as children leave for college.  However, some people find themselves living in their same home for decades, and only move when they require more assisted living.  The market value for homes is very volatile and the fluctuation can result in significant tax consequences, especially when the foreign exchange rates are considered.  Luckily for Canadian citizens and residents, this increase in market value of our homes is placed in our back pocket to invest however we wish.  For the dual citizen or U.S. citizen living in Canada, they are not so fortunate.  The U.S. does not recognize this principal residence exemption.  There is a maximum $250,000 exemption available per person depending on both ownership and use tests.  A move can create a substantial unexpected tax bill in April.

If you feel any of these issues impact you or your family, please do not hesitate to contact our firm.  We would be more than happy to assist with these issues, and the many more, which plague the U.S. citizens living in Canada.

Tax Considerations for US Citizens in Canada
About the Author
Nicole has lived in Vancouver all of her life.  She joined the firm in November 2012 and has worked in the public accounting industry since 2009 while completing her Bachelors Degree in Accounting at Kwantlen Polytechnic University.
Phone: 604-688-7800 / 587.401.4900