US persons resident in Canada

The United States taxes its citizens, residents and green-card holders (collectively, US persons) on their worldwide income, regardless of whether they live in the United States. As a result, if you’re a US person living in Canada, you’re generally required to file both a Canadian and a US income tax return.

Although there are several mechanisms in place to prevent double taxation, the many differences between the two tax systems can still lead to unexpected tax liabilities— for example, capital gains or losses on the sale of capital property, exempt municipal bonds, income earned in a TFSA and RESP, and many others. In 2013, the US introduced a new Net Investment Income Tax which can create a US tax liability which cannot be offset with a foreign tax credit for Canadian taxes paid. For this reason, you should always obtain professional tax advice if you’re a US person residing in Canada. Based on your holdings, special US reporting (in addition to income tax filings) may be required.

Filing your returns

For Canadian tax purposes, each taxpayer must file a separate return. For US tax purposes, you have the option of filing a joint return with your spouse. If your spouse has little or no income, but you’re paying tax to the United States, filing a joint return will generally be beneficial.

If your spouse is not a US person, you can still file a joint return, but the rules are a little more complicated. First of all, you must file an election to treat your non-resident spouse as a US resident. Once this election is made, your spouse must file a US income tax return each year until the election is revoked. Once revoked, the election cannot be reinstated. During the years in which the election is in force, you and your spouse may decide annually whether to elect to file a joint return. This decision can change from year to year. A discussion with your tax adviser is recommended.

If you’re a US person, you’re generally required to file a US tax return even if you owe no US tax. If you have not been filing a US return, you should get 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 US government. US legislation has significantly increased penalties for non-compliance. There are special voluntary disclosure programs and new guidance available from the IRS for US persons who are delinquent in some or all of their US tax and financial information filings. If you are not compliant with your US tax obligations, you should discuss your options with your tax advisor.

If you’re a US person living in Canada, you have an automatic extension to June 15 to file your US tax return, but any tax due must be paid by April 15. Interest will be charged on any unpaid tax from April 15, but no late- filing penalties will be assessed if you file by June 15 and attach the required statement to your tax return. You can also receive an automatic extension to October 15 if you file an application and pay at least 90% of your final tax liability. Late-filing income tax penalties are assessed only if there’s a balance due on your return. Therefore, if there’s no balance due, you should not be subject to any late-filing income tax penalties.

Ownership of registered savings plans by US persons

If you’re a US citizen, permanent resident visa (green card) holder or US resident,34 and you hold an interest in a Canadian RRSP or RRIF, you should contact your tax adviser to determine your filing obligations under these rules. Prior to December 31, 2014, a US person was generally required to file an election on Form 8891, US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, to defer the undistributed income generated in the RRSPs or RRIFs. The IRS eliminated this form on December 31, 2014. US persons will now generally automatically qualify for the US tax deferral treatment if they have RRSP or RRIF accounts. These changes apply retroactively to taxpayers that did not properly file Form 8891 in previous taxation years. It should be noted that because you no longer are required to file Form 8891 you will now have to disclose these RRSP and RRIF accounts on Form 8938, Statement of Specified Foreign Financial Assets, if you meet the filing thresholds for the Form 8938. There are also special reporting requirements for RESPs, RDSPs and TFSAs as they are not deferred plans under US tax rules.

34 Collectively defined as ‘US Persons’ under the relevant legislation.