- A US citizen must always file a US form 1040 tax return regardless of where he resides and, subject to some minor relief (the foreign earned income exemption of about US$90,000), must pay US tax on worldwide income computed under US rules. Effectively, these rules mean that a US taxpayer living in Canada pays tax at the higher of the two rates--US and Canadian--on all income and cannot benefit from tax incentives in the other country. For example, a US citizen resident in Canada cannot benefit on his or her US tax return from the deduction for an RRSP contribution or the 100 percent deduction for Canadian exploration expenses, because the US tax is effectively increased to the extent that foreign tax credits for Canadian tax have been reduced. Similarly, although Canada has a principal-residence exemption, any gain exceeding US$250,000 on the sale of a Canadian house is taxable in the United States to a person obliged to file a US return for worldwide income.
- US gift tax may restrict estate freezing, asset protection, and gifting to spouses and children. The traditional Canadian corporate estate freeze attracts US gift tax; elementary asset protection such as having the family home in the name of the non-US citizen is difficult to accomplish, given the gift tax parameters; and the permitted annual gift is US$13,000 to each child and US$134,000 to a non-US-citizen spouse. Gifts of US$100,000 or more received from non-residents must be reported by the donee.
The US estate tax and gift tax of up to 35 percent for estates over US$5 million may impair or preclude the transfer of wealth to the next generation.
- Annual reporting requirements apply to settlors and beneficiaries of foreign trusts. Non-reporting may trigger penalties of 35 percent of the value of property transferred to a trust, 35 percent of distributions therefrom, and 5 percent a month for gifts from non-US persons. Reporting is also required of foreign grantor trusts.
- Controlled foreign corporation rules require that tax be paid on subpart F (passive) income regardless of whether that income is distributed. These rules may apply to a US-citizen Canadian resident who forms a Canadian holdco to own investments.
- Passive foreign investment company (PFIC) rules require the taxation of undistributed passive income and gains in foreign (non-US) companies not controlled by US shareholders. To be a PFIC, a foreign corporation must have passive income of at least 75 percent of its gross income, or 50 percent or more of its assets must generate passive income. Recent amendments require annual reporting by PFICs regardless of whether distributions are made. A US$10,000 non-filing penalty is imposed.
- A foreign bank account report (FBAR) must be filed on pain of onerous penalties for non-compliance: if non-filing is wilful, 50 percent of the account balance computed annually may be forfeited, and criminal sanctions may also be imposed. Multiple years of non-reporting may result in penalties that exceed the cash in the account. Financial interests in or signing authority over bank accounts, securities accounts, and other financial accounts in foreign countries must be reported annually.
- Disclosure requirements are part of the tax return for specified foreign financial assets with an aggregate value over US$50,000 and require reporting--separate from the FBAR rules--of depository accounts, financial accounts, stocks and securities issued by a non-US person, and an interest in a foreign entity. The minimum non-compliance penalty is US$10,000; a 40 percent additional penalty is imposed for undisclosed or undervalued foreign financial assets.
- Expatriation rules (departure tax) apply if the US citizen or green-card holder decides to renounce his or her green card or US citizenship. Some US reporting is required for 10 years after expatriation if the person's assets exceed US$2 million and annual taxes exceed a threshold. If an individual makes a gift in the 10 years following his or her expatriation, the recipient may be subject to gift or estate tax.
- Effective in 2014, a US citizen who wishes to open a foreign bank account or an investment account will experience increased difficulties as a result of FATCA (the Foreign Account Tax Compliance Act). FATCA can result in a 30 percent withholding on payments made to a foreign financial institution that does not enter into an IRS disclosure agreement that requires it to identify US accounts and report them to the IRS annually. The bank must inquire about the account holder's citizenship and place of birth. In consequence, many foreign banks are refusing to deal with US citizens.
- Temporary but punitive voluntary disclosure rules apply and include a fixed penalty, taxes, and interest on previously undisclosed amounts.
Aird & Berlis LLP, Toronto