Unlike other countries in the developed world, U.S. citizens residing in Canada are required to file income taxes in both Canada and the United States.
However, both countries have developed tax policies independent of one another. What is taxable in one country may not be taxable in the other and vice versa, resulting in the increased possibility of double tax exposure.
Because of complications like these, some American citizens residing in Canada have failed to remain compliant with U.S. tax regulations. A new IRS procedure is attempting to eliminate, or at least reduce, the penalties for non-compliant expatriates.
1. Streamlining the path to compliance
The IRS’s (Internal Revenue Service) new streamlined procedure is intended to serve as an easy way for low risk non-filers to come back into the fold without penalty. Before, you only qualified if you had $1,500 or less tax owing to the U.S, which is a very low threshold. Eliminating that requirement has opened up the streamlined procedure to many new people.
The old procedure included a risk profile questionnaire that made many people uncomfortable – there were several confusing questions, and answers fell under the penalty of perjury. Eliminating that questionnaire has resulted in more certainty and eased the process for late filers. The IRS has also indicated that returns submitted under the streamlined procedure will be subject to the same risk of audit review as any other U.S. filing, rather than more intense scrutiny.
2. What’s the catch?
Unfortunately, some U.S. citizens residing in Canada no longer qualify for the streamlined procedure because of how often they travel back to the United States. Snowbirds and people who live close to borders are perfect examples. Take the case of a U.S. citizen resident in Canada who lives here most of the time, doesn’t know they need to file, but spends a couple months a year in Florida. They would not qualify for the non-resident streamlined track, making them vulnerable to severe penalties.
Also, before taxpayers qualify for the streamlined procedure, they must certify that their non-compliance was non-willful. The certification must include specific reasons why they failed to comply. With greater media coverage on the topic, it’s increasingly more difficult to provide a statement of this kind. If you can’t make that claim or the IRS doesn’t buy your story, you simply won’t qualify.
3. There must be another way
A small number of expatriate Americans actually consider renouncing citizenship to avoid the filing burden. It can be a time-consuming and expensive process though, and of course involves other repercussions.
Other U.S. citizens who are also Canadian residents explore cross-border estate and tax planning options. Careful planning can allow them to walk a fine line between the two tax regimes, avoiding double taxes (and sometimes taking advantage of opportunities)
Whatever option suits your situation best, if you know you’re not compliant, the time to correct that is now. Try to take advantage of the streamlined procedure as soon as possible to avoid penalties later on down the road. It may not last forever!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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