U.S. citizens resident in Canada and FATCA

The U.S. imposes U.S. tax on its citizens and residents (as defined by U.S. tax law) regardless of where these individuals actually reside. Conversely, Canada only taxes its residents on their worldwide income. U.S. citizens resident in Canada are subject to the tax law of both Canada and the U.S. and must be aware of the differences in the respective tax systems.

Offsetting foreign tax credits and double taxation

Even where the same income is taxable in both countries, the availability of offsetting foreign tax credits will generally avoid taxation in both countries without offsetting foreign tax credits. Double taxation can occur despite the protection of the Canada-U.S. tax treaty. Usually such results occur where one country taxes the transaction immediately, but the other defers the tax.

For most U.S. citizens resident in Canada they will only pay Canadian tax. There are numerous situations where the U.S. tax may exceed the Canadian tax. These include situations where Canada may not assess any tax such as with the sale of a qualifying business, lottery winnings or where it taxes the income preferentially, such as with the exercise of stock options.

Tax regime differences matter

While there are many similarities between the tax regimes in Canada and the U.S., there are also many differences which must be considered and factored into the investment decisions of U.S. citizens living in Canada. For example, a U.S. citizen holding units in Canadian mutual funds may have adverse U.S. tax results and trigger additional U.S. tax reporting requirements. These results may destroy the investments’ return.

Deferred tax status of savings vehicles can differ

The tax deferred status given to registered plans such as the Registered Education Savings Plan (RESP) in Canada are not given the same tax treatment in the U.S. U.S. citizens holding investments in these savings plans may find themselves subject to additional U.S. tax and reporting requirements. U.S. citizens in Canada should assess whether these savings vehicles are desirable given the tax consequences are less favourable from a U.S. tax perspective.

Capital gains

Another significant difference is the U.S. taxation of capital gains realized on the sale of a principal residence. U.S. citizens who sell their homes in Canada and realized gains may be surprised to find that their gains may not be totally exempt from U.S. tax even though gains from sale of a principal residence are not taxable in Canada. Tax planning in advance of a sale may be possible to avoid the applicable U.S. tax.

Our tax professionals at Andersen have extensive experience advising U.S. citizens resident in Canada on their tax compliance and planning needs. We have the U.S. cross-border tax knowledge to help our clients successfully manage their tax affairs in both countries to avoid any unintended tax results.