Tax Filing for Dual Citizens
Dual citizenship provides many benefits, including job mobility and voting rights. It provides a platform for individuals to travel for long periods of time between countries for personal and professional reasons, without restrictions and without being required to apply for a visa.
Canada and the United States have different tax filing requirements and regulations depending on the citizenship and residency of the taxpayer. As mentioned above, in Canada, one’s tax filing requirements depend on residency of the taxpayer, while in the United States, the tax filing requirements are based on your U.S. person status, such as U.S. citizenship. For over one million U.S. citizens living in Canada, they would have to file income tax returns in both countries. When it comes to holding a dual citizenship, you have to consider the tax factors associated with the dual citizenship status.
Foreign Account Tax Compliance Act (FATCA)
According to the Foreign Account Tax Compliance Act (FATCA), non-U.S. financial institutions are required to report to the U.S. Internal Revenue Service (IRS) (through the Canada Revenue Agency under the Model I Intergovernmental Agreement (IGA)) accounts held by Canadian residents, that includes U.S. persons, such as U.S. citizens. Some thresholds and exceptions apply, but generally, if the financial institution does not comply with FATCA requirements, U.S. payers are required to withhold a tax equal to 30 percent on payments to the non-compliant financial institution. That 30 percent withholding is effectively a penalty and, if found in violation of the FATCA requirements, the financial institution risks such penalty being applied to all of its account holders. Of course, that is something that no Canadian financial institution can afford.
All Canadian financial institutions have been going through the due diligence process of identifying pre-existing accounts (as of the FATCA effective date) held by U.S. account holders. You have been probably asked already to complete a non-U.S. person certification or IRS Form W-8BEN (non-U.S. persons) or Form W-9 (U.S. persons). Besides the obligations of financial institutions, U.S. citizens are required to personally inform the U.S. Department of Treasury (Foreign Bank Account Report (FBAR)) and the IRS (Form 8938, if applicable) about any registered accounts in Canada, provided the aggregate highest maximum value or balance in the account exceeded certain threshold. Note that once the threshold amount is reached, even accounts with zero balances must be reported. Certain accounts are exempt from the FATCA reporting requirement (not taxpayer’s individual reporting, but rather the reporting to the CRA under the IGA). The examples of such exempted accounts include Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Registered Education Savings Plan (RESP), and Tax-Free Savings Account (TFSA).
Double-Check Your Citizenship Status
Many people neglect to file their tax returns with the IRS because they are unaware of the filing obligations they have. This can be due to the lack of knowledge about the tax filing and reporting obligations required because of the dual citizenship status or due to the lack of knowledge that they are U.S. citizens (Accidental Americans). Some of dual citizens, even if they do realize after years of being a dual citizen that they have the U.S. tax filing and reporting responsibilities, may try to avoid the hassle and expense associated with catching up on delinquent tax returns and forms (such as FBAR). The time is running out for those taxpayers.
Being a dual citizen and having various tax forms to file with more than one government means that you will have to follow two sets of rules and regulations. Such complicated tax compliance landscape usually results in added accounting fees. The U.S. tax law, especially, when it involves cross-border and international tax context, is complex. One way to reduce one’s tax compliance costs is to re-evaluate your investment strategy and simplify your investment portfolio.
For example, there is uncertainty as to how the TFSAs and RESPs should be treated for U.S. federal income tax purposes. Investments in Canadian mutual funds or Canadian passive companies raises the issue with one of the U.S. anti-deferral regimes – Passive Foreign Investment Company (PFIC) regime. Not only there is uncertainty and the inability of dual citizens to take advantage of tax deferral (you would generally report the growth in the said investments on a current basis in the United States, even though they offer tax deferral in Canada), but on top of that it adds additional tax and accounting costs annually.
One more area is the ownership of Canadian corporations by dual citizens. If U.S. shareholders own more than 50 percent by vote or value of a non-U.S. corporation, such corporation is considered a Controlled Foreign Corporation (CFC) and is then subject to another anti-deferral regime – Subpart F rules. This, again, may lead to additional tax and increased tax compliance costs. The new Global Low Intangible Taxable Income (GILTI) tax would further complicate tax compliance and the overall tax impact on dual citizens owning CFCs.
One viable strategy for dual citizens is to re-evaluate their investment portfolio and choose those investments that, while providing an acceptable return, do not lead to additional tax and compliance costs. They may also want to restructure their corporate ownership in some cases.
IRS Amnesty Programs
In 2014, the IRS announced a program that would assist U.S. taxpayers in catching up with their US tax filing and reporting obligations. The program is the Streamlined Filing Compliance Procedures. It aims to help alleviate several tax issues the dual citizenship community has been facing. Only non-willful taxpayers, those who were unaware of their tax filing and reporting obligations, are eligible for the Streamlined Filing Compliance Procedures. Taxpayers with willful conduct could address their non-compliance via the IRS Offshore Voluntary Disclosure Program that is set to close on September 28, 2018.
The IRS has other amnesty programs and dual citizens who want to catch up with their delinquent tax filing and reporting obligations should talk to their U.S. tax advisor and come into compliance as soon as possible. They can also evaluate the applicable eligibility requirements for the applicable IRS Amnesty program and determine what is the best program for them to become U.S. tax compliant.
Tax Filing Deadlines
The tax return deadline is usually April 15-th of the year following the tax year that is being reported (unless it falls on a weekend or a holiday). For example, the general U.S. tax filing deadline for the 2017 tax year was April 18-th , 2018 (the IRS has extended the April 17-th deadline by one day due to some technical issues related to electronic filing).
Requirements for Dual Citizens Residing in Canada
For U.S. persons living outside the United States, the general tax filing deadline is June 15-th . If you reside in Canada, you generally get an automatic 2-month extension to file your return, which is usually June 15-th of the year following the tax year that is being reported. If you are unable to file your return by June 15-th, you can further extend the filing deadline to October 15 by filling with the IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
I Missed the Tax Filing Deadline! What Do I Do?
If you accidentally miss the tax filing deadline, that is not an issue. The IRS has a couple of tips
● File the forms you are required to file as soon as possible — this will minimize interest/penalty charges. If you do not owe any tax, you will not be penalized.
● Use IRS Free File to e-file your federal taxes for free! Certain income thresholds apply.
● For paying taxes, try to pay them off all at once. If that is not possible, work towards paying your tax liability off as soon as possible to avoid further penalties and interest charge. You can also enter into a payment plan with the IRS.
The dual citizenship provides many benefits, but is entrenched with significant complexity and cost when it comes to tax filing and reporting obligations. It may be easy to use one of the inexpensive software solutions to file your U.S. tax return when all you got is the employment income, you reside in the United States, and do not have cross-border transactions or foreign assets/accounts. As the cross-border and international tax context become relevant, you should consult cross-border tax professionals who are knowledgeable about the U.S. international tax and cross-border tax rules. Talking to a qualified U.S. tax advisor, such as U.S. Tax IQ, can be beneficial to you so that you can resolve your U.S. tax matter and rely on advice of a qualified U.S. tax professional for penalty protection purposes. Below are some of the services we offer to dual citizens.
Whether you are a small to medium-sized business or looking for personal tax return assistance, our team can provide you with tax consulting, compliance, structuring, and planning services. With a dual citizenship, it may be complicated to understand in which instances tax returns need to be filed or what due dates apply to your case. More importantly, being pro-active will save you both time and extra costs if your case is audited by the IRS.
Along with the tax services provided by U.S. Tax IQ, we are also integrated with Law Office of Alexey Manasuev that can provide certain legal services that can be extremely helpful in cases where you are U.S. citizen living outside the United States (holding dual citizenship). By combining legal and tax expertise, we are uniquely suited to help you with your U.S. international tax and cross-border tax matters.