US citizen in Canada Tax Tips

The United States taxes its citizens on their worldwide income, whether or not they live in the United States. As a result, if you are a U.S. citizen living in Canada you are required to file a tax return under both systems.

Watch out for tax liabilities

Although there are several mechanisms to prevent double taxation, there are still many differences between the two income tax systems that can lead to unexpected tax liabilities. One of the most glaring differences between the two systems is in the area of capital gains. For this reason, you should always obtain professional tax advice if you have sold, or are considering selling, capital property.

If your income is high enough you may also have to pay a certain amount of U.S. alternative minimum tax even though your income is fully taxed in Canada. Be aware of this potential liability when planning your income.

Filing your returns

For Canadian tax purposes, each taxpayer must file a separate return. For U.S. tax purposes, you have the option of filing a joint return with your spouse. If your spouse has little or no income but you are paying tax to the U.S., filing a joint election will generally be beneficial. If your spouse is not a U.S. citizen, the decision to file jointly can only be made once. This election applies automatically to all subsequent years unless it is revoked. Once revoked, the election cannot be reinstated.

If you are a U.S. citizen, you may be required to file a U.S. tax return even if no U.S. tax is owing. On October 1, 1992, the Internal Revenue Service (IRS) launched a "non-filer program" in an attempt to bring back into the U.S. tax system taxpayers who have not been filing returns. Substantial resources are being devoted to finding non-filers who are likely to owe a significant amount of tax. An IRS information return must now be completed in conjunction with the processing of all passport applications. If you have not been filing a U.S. return, you should obtain professional advice.

As well as filing a tax return, you may also be required to disclose a substantial amount of other financial information to the U.S. government. Contact your professional adviser for further details.