Clarity Tax & CPAs
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Clarity Tax & CPAs
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Cross-border tax services can help you save money on your taxes if you live, do business, invest or commute between Canada and the US.
Does this sound like you?
If you fit into one of these categories, you may need a cross-border tax specialist. The US and Canada have drastically different tax laws, and working with a cross-border consultant can help you avoid the cross-border bill you never saw coming.
Cross-border tax accountants can help you avoid double taxation. If Canada and the United States both consider you a tax resident, you could be liable for taxes in both countries. A good cross-border tax accountant can help you avoid overpaying.
You may be at risk of double taxation if:
Cross-border tax services are critical to understanding how to file correctly and what your requirements are for each country. This is where a CPA who specializes in cross-border tax compliance can become an invaluable asset in your personal tax planning process. You want a cross border tax specialist that stays informed of relevant changes in US and Canadian tax law, so they can help you minimize your tax burden.
Cross-border tax preparation can be a multi-layered process that includes filing tax returns in both the US and Canada. If you’re a US citizen or green card holder (aka lawful permanent resident of the US,) you’re required to report all of your worldwide income, no matter where you live. You may also be liable for state income taxes.
The US and Canada each determine tax residency using different methods. Unfortunately, you can be taxed by both countries for the same tax year.
The CRA (Canada Revenue Agency) levies taxes based on your residency status during the tax year. In the US, the Internal Revenue Service (IRS) considers you a tax resident if you meet either the green card test or substantial presence test.
If the IRS considers you a US tax resident, you’ll be required to report your worldwide income. US citizens and green card holders are considered tax residents of the USA, no matter where you live.
Sound confusing? It can be, and you don’t want any misunderstandings that could lead to missed or late filings. Consult a cross-border tax accountant to determine if you need to file tax returns for both countries, and how you can avoid double taxation.
Canada’s departure tax is the single biggest surprise for people moving out of Canada. The US doesn’t have a departure tax, but Canada does. The CRA treats most of your assets as though you sold them at fair market value when you exit the country.
If you move away from Canada and become a US tax resident via the Substantial Presence Test, you could be responsible for a significant capital gains tax bill, even though you didn’t actually sell anything. This concept is called deemed disposition, and it applies to your investment accounts, real estate and business assets.
If you own a business with significant retained profit in Canada, you could take a very large taxable gain upon your departure.
Foreign asset reporting mistakes (or failure to report) are some of the most common errors I see in cross-border tax accounting. Once you become a US tax resident, you may need to report your Canadian bank accounts, brokerage accounts and mutual funds to the US. This requires filing an electronic FBAR (Report of Foreign Bank and Financial Accounts) on FinCEN Form 114.
If you’re a US citizen or resident alien, you may also be required to include Form 8938 (Statement of Specified Foreign Financial Assets) in your federal tax return. The filing threshold for Form 8938 is based on where you live and your filing status. Penalties for not disclosing your financial assets on this form start at $10,000 USD.
The IRS Streamlined Filing Compliance Procedures allow you to catch up on your US tax filing if you failed to report foreign financial assets in previous tax years.
This involves filing 3 years of back taxes, and up to 6 years of FBARs, if your foreign bank accounts meet or exceed reporting thresholds. Many cross-border tax specialists offer filing packages that include amended tax return filing if you have unreported income on foreign assets.
TFSA accounts (tax-free savings accounts) you opened in Canada may lose their tax-free status if you move to the US. Purchasing mutual funds or ETFs (exchange-traded funds) in your tax-free savings account after you move to the US can further increase your tax liability. Your cross border tax accountant can help you determine if you should close your TFSA and find alternative investments that better suit your personal tax planning strategy.
If you move from the US to Canada, you may not be able to make tax-free contributions to a TFSA account until you become a resident of Canada.
RRSP (Registered Retirement Savings Plan) accounts are similar to American traditional IRAs or 401(k) retirement plans. Both provide tax deferral and allow you to deduct contributions, but unlike traditional IRAs or 401(k) accounts, RRSPs don’t penalize you for early withdrawals. If you move from Canada to the USA and already have an RRSP, you can usually keep it.
If you plan to move your business across borders between the United States and Canada, you may want to contact a cross-border tax accountant first. Canada doesn’t recognize LLCs, S-corps or certain partnerships.
If you move an American business to Canada, and the CRA categorizes it as a corporation under Canadian tax law, you may not be able to take advantage of foreign tax credits.
In some cases, it may be beneficial for you to change your business structure to a C-corp or sole proprietorship. This is a complex decision, and consulting a cross-border tax services specialist before you move to Canada can help you determine the best structure based on your business and where you plan to set up your new operations.
Canada and the United States use different criteria to determine your tax status. While Canada bases your tax liability on residency ties (your home, family, spouse, etc.,) the US uses the green card (permanent resident) test or Substantial Presence Test.
If you’re a US citizen or permanent resident, the US can also tax you based on your worldwide income, no matter where you reside. To avoid any surprises at tax time, contact a cross-border tax accountant before moving between Canada and the US.
Cross-border tax compliance errors usually occur when:
Foreign tax credits can help reduce your tax liability if you find yourself taxed on foreign income. If you owe taxes in the US, but you live in a foreign country for most of the year, you may be able to take the Foreign Earned Income Exclusion (FEIE). Ask your cross-border tax consultant to help you determine which of these foreign tax treatments might work best for you.
Using tax software to file cross-border taxes sounds so convenient. But most tax software is designed for the general population, not those with complex cross-border tax issues. Tax software programs often don’t offer the foreign forms you need to file a cross-border tax return. This includes forms like the foreign tax credit form and foreign asset reporting forms.
Kelly Sheng is a Canadian Chartered Professional Accountant, Certified Public Accountant and cross-border senior tax manager with two decades of US-Canada experience. Kelly specializes in cross-border tax accounting, and serves clients across the US and Canada. She is registered with the Canada Revenue Agency through CRA EFILE.
Book a FREE consultation to discuss your cross-border tax situation. We’ll help you determine what you need to file in each country and how to avoid double taxation, surprise departure tax, and foreign reporting penalties.
Book a Free ConsultationCross-border tax issues can arise when Americans move to Canada and become subject to Canadian tax law, or Canadians move to the US and have to pay Canada’s departure tax. The US and Canada use different methods to determine tax residency, and you may have to pay taxes in both countries. Canada doesn’t recognize certain types of American business entities, including LLCs and S-corps, which can cause confusion and lead to tax filing errors in both Canada and the USA.
Most tax software programs don’t have the foreign forms you need to file cross-border tax returns. A cross-border tax accountant can help you file the correct tax forms and avoid double taxation in the US and Canada.
Cross-border tax preparation costs depend on whether you need cross-border tax services in the US or Canada, need to file returns for an individual or business, and the specific forms you need to file. Working with a cross-border tax consultant can help you save thousands by avoiding double taxation and costly penalties for common cross-border errors, like failing to report foreign accounts.
One of the biggest tax mistakes people make when moving between the US and Canada is failing to report foreign assets. You also risk double taxation if you’re eligible for foreign tax credits and don’t claim them.
Some of the costliest cross-border tax mistakes occur when US businesses move to Canada, especially large LLCs, S-corps or certain partnerships. Canada does not recognize these types of business entities, and will often tax them as corporations, which keeps them from claiming foreign tax credits. In these situations, a cross-border tax accountant can often help you restructure your business to receive more favorable tax status.
You should contact a cross-border CPA as soon as you decide to move from the US to Canada or from Canada to the US, especially if you have TFSAs or own a business. Most cross-border tax consultants recommend you contact them at least three months prior to your cross-border relocation.
Request a FREE consultation to discuss cross-border tax services with Sr. Tax Manager Kelly Sheng.
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