Federally Licensed Tax Professional Clarifies Consequences for US Citizens Working in Canada

October 11, 2011 by  Filed under: Taxes 

A US citizen living or working in Canada incurs not only a tax obligation to the Canadian government but is also still liable for US income tax. Every tax preparation business is aware that the IRS imposes collection of income tax on worldwide income of US citizens. But US citizens also report holdings of foreign assets to the IRS.

Earlier in 2011, the IRS provided an amnesty program for a limited time that permitted US citizens to declare offshore assets they had previously failed to disclose. The types of assets covered in required declarations are not only bank accounts. Professionals in the tax preparation industry should be aware that disclosure of Canadian retirement accounts is also mandated. This includes accounts with acronyms such as RRSP, RESP, and TFSA. Declaration of these foreign assets is necessary if one or a combination of these accounts has total value of at least $10,000.

Although US tax law demands reporting of assets in any foreign country, a federally licensed tax professional most often encounters taxpayers with Canadian holdings. The objective of the IRS is to find tax evaders who hide assets offshore. The problem for US citizens in Canada is not so much tax evasion but ignorance of reporting compliance obligations.

As a result, many innocent people are caught evading mere reporting responsibilities although they are not real tax evaders. Individuals engaged in registered tax return preparer employment can help US taxpayers working in Canada avoid problems with disclosure of foreign assets.

The confusion is possibly a consequence of the distinctive actions of the Canadian Revenue Agency (CRA). The CRA only collects taxes under the Canada-United States Income Tax Convention. Penalties are only assessed on tax obligations. No provisions exist to penalize reporting requirements.

A new law also takes effect in 2013. This requires foreign banks with American locations to disclose the citizenship of their depositors in the US branches. The penalty for failure to reveal this information is 30 percent of any cross-border payments and 30 percent of the proceeds from selling any US assets. Considerable dispute has arisen over this US law, which appears to violate banking privacy laws in Canada and several European countries.

Until the IRS is more flexible in its methods for pursuing tax evaders, tax preparation services should continue helping people with foreign assets meet their disclosure obligations. This is the only process of assuring that innocent US taxpayers in Canada are not punished. For now, even individuals with dual citizenship face harsh penalties for living in Canada while retaining their US citizenships.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for tax preparation business and tax professionals. Access to free questions for the tax preparation industry is available on their website.

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