Guide to US Taxes for Citizens Living in Canada

Life in a foreign country can be tough, not only because of the cultural barriers that exist between people, but also because of the tax implications. American citizens living in Canada will likely face tax pressure from both the U.S.-based Internal Revenue Service (IRS) and its counterpart, the Canada Revenue Agency (CRA). Figuring out the requirements to please both of these government agencies may require experience with international tax matters – experience that’s readily available from the team at U.S. Tax Help. If you or someone you know is an American living in Canada and would like to learn about U.S. expat tax returns for taxpayers who live in Canada, keep reading.

Tax Requirements for U.S. Citizens in Canada

It can be easy to think that moving abroad relieves you of your tax obligations to the IRS, but the reality is just the opposite. The United States is one of only two countries in the world that taxes based on citizenship instead of physical location or country of residence, making them one of only two countries to do so (the other is Eritrea, though their taxes for non-residents are much more forgiving than the American version).

To satisfy these requirements, a U.S. citizen paying taxes from Canada or elsewhere in the world has to file a tax return with the IRS, just like any other citizen. This tax return is due on April 15 – again, just as with those living within the country – though expats have the benefit of several extensions, including an automatic 2-month filing extension that pushes their effective deadline back to June 15. Additional extensions let Americans living abroad move their filing deadlines to October 15, or even December 15 in some cases.

In addition to the traditional income tax return, expats often have to provide more paperwork detailing their foreign assets, such as stocks, dividends, property, and bank accounts. These requirements necessitate the use of forms such as the Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR; read more about these reporting requirements below.

What to File When Living Abroad

The familiar IRS Form 1040 will still be required if you move to Canada, as the U.S. government taxes based on worldwide income, including what you earn in Canada. However, there are some tax provisions that can mitigate the financial burdens Americans face when living abroad; the most popular and effective of these are the foreign earned income exclusion and foreign housing exclusion (or deduction, depending on whether you work for a company or are a self-employed expat).

The foreign earned income exclusion, or FEIE, allows American taxpayers to essentially subtract more than $100,000 of their foreign-earned income from their taxable income under U.S. law. The exact about that can be excluded is adjusted for inflation each year, so it varies between tax seasons; for the 2019 tax year, the exclusion amount is $105,900.

To receive the foreign earned income exclusion, you’ll have to file Form 2555 with the IRS, though you’ll have to pass one of two tests: either the bona fide residence test or the physical presence test.

  • The bona fide residence test examines whether you have been a “bona fide” resident of a foreign country for at least one full tax year. The IRS makes this determination on a case-by-case basis.
  • The physical presence test requires that a taxpayer be physically present in a foreign country for at least 330 full days over the course of a year.

These requirements also apply to the foreign housing exclusion and deduction, which allow a taxpayer to subtract their housing costs from their taxable income as well; whether you use the deduction or exclusion will depend on the nature of your employment.

Not all filing requirements are designed to benefit expat taxpayers, however; some force Americans living abroad to report certain assets to the IRS, which requires even more paperwork. The FBAR is probably the most common of these; taxpayers with more $10,000 across one or more bank accounts must file an FBAR using FinCEN Form 114. This form is available online through the Financial Crimes Enforcement Network website and must be filed electronically.

Another key reporting tool is IRS Form 8938, Statement of Specified Foreign Financial Assets, which is used to comply with the Foreign Account Tax Compliance Act, or FATCA. Taxpayers who live abroad, are single, and have more than $200,000 in “specified foreign financial assets” at the end of the tax year, or $300,000 at any point during the year, must file Form 8938 with the IRS to ensure compliance with foreign account tax rules.

As with all filing requirements, failure to file the correct forms on time will result in one or more penalties. The penalties for late tax filings as an expat can prove to be a significant financial burden; failure to file the FBAR, for example, can lead to thousands of dollars in penalties, and failure to file your tax return on time can lead to the accumulation of interest on an already sizeable tax bill. A qualified international tax specialist can help you avoid these consequences.

International Tax Assistance Available from U.S. Tax Help

Navigating the many tax challenges that U.S. taxpayers in Canada face can be quite difficult. Not only do expats have to contend with the same issues that many domestic taxpayers face, but they have a number of additional considerations to keep in mind as well. If you or someone you know lives in Canada but is still an American citizen, turn to the experts at U.S. Tax Help for the assistance you need. Learn more about all our services by visiting us online or calling (541) 362-9127 today.