This is a statement I read on the IRS website, "The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts. "
American taxpayers are required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent Foreign Bank and Financial Accounts for the past six years. All submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. The review could be expedited and the IRS will not assert penalties or pursue follow-up actions or they could be subject to a more thorough review and possibly a full examination. Tax, interest and penalties, if appropriate, will be imposed in accordance with U.S. federal tax laws based on a review of the submission.
As a U.S. citizen you are taxed in the same way and according to the same rules as U.S. citizens who live in the U.S. It is important to understand that the U.S. tax system is almost the exact opposite of Canada’s tax system. Mainly because retirement planning in Canada is based on the principle of tax deferral through the use of an RRSP or TFSA. The U.S. tax system is designed to attack “tax deferral” and will severely punish you if you invest in these things.
The U.S. tax system operates on the basic principle that if something is “foreign” it should be punished
The U.S. tax system operates on the basic principle that if something is “foreign” it should be punished. Under no circumstances should a U.S. citizen living in Canada or a Canadian married to a U.S. Citizen invest in a TFSA. The reporting costs and potential for penalties for investing in a TFSA are so extreme that you should run. TFSAs are only recognized as Trusts. As a trust form 3520A is supposed to be filed by March 15. Then form 3520 when you file your US income tax. Just adding the income to your income tax is not what they want. The IRS fine for not filing these forms is $10,000 or 35% of the account.
Next any dual or US citizen living in Canada who has opened a RESP must also file the same forms. Unlike RRSPs an RESP is recognized as a trust and also is taxed by the IRS.
Many will see the difficulties as being too great, too time consuming and too expensive and will renounce their U.S. citizenship. Canada only taxes by residency. The US taxes by birth. Once a citizen always a citizen. You pay tax no matter where you reside. If you want to give up your citizenship you have to pay all taxes you are deemed to owe. This means if you own a business or a home, you have to pay the taxes on unrealized capital gains on them to be free.
Who could have known all this? U.S. Citizens and those married or in a common law relationship with a U.S. Citizen should stay away from any Canadian investment plans and make sure you get advice from a professional who has international planning experience. Although an RRSP is a “Foreign Trust”, they are covered by special arrangements. First, the IRS does not require the 3520 for RRSPs but Form 8891 is required every year to ensure that the income from your RRSP does not have to be included on your U.S. tax return. The news does get worse if we were to look at Canadian mutual funds and home ownership.
Foreign Account Tax Compliance Act
Oh and by the way, beginning January 1, 2014, the Foreign Account Tax Compliance Act will require Banks, Insurance Companies, Investment Firms and Credit Unions to collect and report certain information on accounts held by U.S. persons to the IRS. Thankfully there are experts who can help guide you through what needs to be accomplished.
Kevin Cahill, B.Sc.(Hons), CFP, CHS, CLU, EPC
canadianlegacybuilder.ca
