Whether you are a U.S. citizen living in Canada, a Canadian spending time in the U.S., or a Canadian with property in the United States, it's important you know your responsibilities when it comes to filing your taxes.
Crowe MacKay LLP's tax advisors highlight how each group with ties to the U.S. may be impacted by either country's tax obligation, helping you save time and avoid penalties.
Tax filing obligations of U.S. citizens living in Canada
If you are a U.S. citizen living in Canada, you still have U.S. tax filing obligations. If you are delinquent in your U.S. filings, the IRS does have a streamlined process in place to allow you to get caught up without penalties. However, it is unclear how much longer the IRS will keep this process open, so if you have been holding off, now is the time to get caught up.
Being a U.S. citizen can also present problems if you hold investments in Canada such as RESPs, RDSPs, TFSAs, and mutual funds or if you are the shareholder of a Canadian corporation. These topics are beyond the scope of this article so it is important to contact your trusted Crowe MacKay advisor for assistance.
I don't have any U.S. income, so why do I still need to file a U.S. tax return?
U.S. citizens continue to be taxed on their worldwide income despite no longer living in the United States. However, as a U.S. citizen living in Canada with no U.S. income, it is very unlikely that you will owe U.S. taxes in which case there would be no penalties for not filing a U.S. tax return. However, the IRS has many additional information return filing requirements that carry extremely hefty penalties, most starting at a minimum of $10,000USD. This is where not keeping up with your U.S. tax filings can quickly become a nightmare.
Additionally, filing your U.S. tax returns will make sure you receive any U.S. benefits you are entitled to such as the economic stimulus payments and child tax credits. When you visit the United States, you may also be questioned as to whether you are current in your U.S. tax filings when you show a Canadian passport with a U.S. birthplace.
If you live in Canada and are or ever have been a U.S. citizen, we suggest you contact your Crowe MacKay tax advisor to determine your tax filing requirements.
Canadians and potential U.S. filing obligations
If you own property in the United States or are spending significant amounts of time there, make sure you let your Crowe MacKay tax advisors know. You can run into tax issues on both sides of the border, so it is important to know and understand the rules and how they may affect you. Both Canada and the U.S. can now track the number of days you are spending in each country, so being aware of your compliance requirements is more important than ever.
Canadian Snowbirds: How much time can you spend in the U.S. before requiring to file a U.S. tax return?
Whether you're a Canadian snowbird or avid traveler, you will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. This means you will have the same tax filing requirements as a U.S. citizen.
The substantial presence test is triggered when you have spent more than 31 days in the U.S. in the current calendar year and a total of 183 days over three years.
Here is how the substantial presence test is applied over three years:
- All days in the current year you were in the US,
- 1/3 of the days in the 1st preceding year, and
- 1/6 days in the 2nd preceding year.
Example: Calculating the substantial presence test over three years
Jane is a Canadian citizen and spent 130 days in the U.S. during the winter months of 2021. In 2020, she visited friends for 130 days in California. The year prior, 2019, Jane was in California again visiting friends for a total of 130 days.
Jane applied the substantial presence test over a three year period in the following manner to determine if she had U.S. tax filing requirements:
2021 = 130 days
+ 2020 (130 x 1/3) = 43 days
+ 2019 (130 x 1/6) = 22 days
= 195 days total
With Jane's total days being higher than 183 she has met the substantial presence test and will be considered a U.S. citizen for tax purposes.
How Canadians can avoid U.S. tax implications when meeting the substantial presence test
There are ways Canadians can avoid the tax implications of being considered a U.S. resident that are beyond this article. If you've been spending time in the U.S., ensure you are not met with any hefty penalties by discussing your situation with a trusted Crowe MacKay tax advisor.
Canadians with property in the U.S.: Know your U.S. tax filing requirements
Depending on your situation, as a Canadian with non-U.S. citizenship and property in the United States, you may have filing requirements. If the property is simply for your enjoyment, then it is unlikely you would have a filing requirement. However, if you rent out the property for more than 15 days in a calendar year, you may have a filing requirement.
Canadian tax requirements for rental properties in the U.S.
For Canadians holding rental property in the United States, the IRS requires a 30% non-resident withholding tax be remitted to them on the gross rental income. The property manager or tenant of the property is responsible for remitting this withholding tax. With properly withheld and remitted taxes, you should not have U.S. tax filing obligations. However, you likely have expenses attributable to the property which would reduce your tax liability to the U.S.
To claim your rental expenses, a special election can be made which will allow you to be taxed on your rental income after those expenses are deducted. If you choose to make this election, you must file a non-resident U.S. tax return to report your rental income, expenses, and potentially pay any taxes that may be owing.
Depending on the state the property is located there could be additional state withholdings and filings required.
Of course, as a Canadian citizen, you will also need to report the rental income on your Canadian tax return and can potentially offset any Canadian taxes owing with a foreign tax credit for any U.S. taxes paid. Additionally, you may need to file a T1135 Foreign Income Verification Statement to report this foreign asset to CRA.
If you own property in the U.S., discuss your tax obligations with a trusted Crowe MacKay tax advisor so they can be aware of your overall holdings and advise you of any potential tax consequences you may be facing.
What happens if I sell my U.S. property?
As a Canadian selling property in the United States, you will be subject to withholding rules under FIRPTA ((Foreign Investment in Real Property Tax Act). This means that the IRS will withhold 15% of the gross selling price at the time of the sale. Additionally, there could be additional state withholdings depending on where the property is located. This doesn't represent what your final tax liability will be on the sale of the property, it is simply the way the IRS ensures you file your income tax return to report the sale of the property. The IRS will hold the funds until you file your non-resident income tax return and refund any excess withholdings once they process the return. The same is true for any state withholdings that may have been withheld.
There are ways to reduce or eliminate the withholding requirement, so make sure you plan ahead if you're thinking of selling your U.S. property (rental or otherwise). As was noted above with U.S. rental income, the sale of the U.S. property will need to be reported on your Canadian income tax return as well. This is another reason it is important to ensure your trusted Crowe advisor is aware of all of your sale activities - both locally and abroad.
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.
