Tax Planning as a Canadian-American Dual Citizen

Having dual citizenship for two of the most advanced countries in the world can come with a host of benefits and privileges. However, it also means increased obligations come tax season.

Both the US and Canada require you to file your income tax with the US following a citizen-based taxation. In contrast, Canada requires you to file your taxes based on residency status.

While citizens of both countries have a compulsion to file their taxes, it doesn’t necessarily mean you’ll be paying double for both countries. In fact, agreements are in place to avoid double taxation through the Foreign Earned Income Exclusion and Foreign tax credits.

The article covers some tax laws to be aware of when having dual citizenship or being an expat, frequenting both sides.

The FBAR

As an American citizen, the FBAR or FinCEN Form 114 is a mandatory report of your foreign financial accounts if they held an amount of $10,000 or more at any point during the financial year. The purpose of this provision is to combat tax evasion using foreign bank accounts.

Failing to file or incorrectly filing an FBAR can carry a maximum penalty of $10,000 and is thus something to take seriously if you’re a dual citizen availing the facilities of a foreign bank.

The deadline for filing your FBAR is April 15, 2024, with a permissible extension up to October 15, 2024.

The Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is a special provision that prevents American expats, dual citizens or resident aliens of countries with which the US has a tax treaty from being doubly taxed in the US and their country of residence.

It excludes you from paying taxes to the US government for income earned up to a stipulated amount in Canada or another country. It can be used to lower or entirely remove your US tax liabilities.

The maximum foreign income that can be excluded through this route is annually adjusted for inflation and was $120,000 per person or $240,000 for married couples in 2023.

Taxpayers will still have to file a tax return to claim this benefit. Your US tax obligations simply do not vanish after paying taxes in another country.

The Foreign Tax Credit

The Foreign tax credit is an alternative to the Foreign Earned Income Exclusion and is used to offset any income tax paid in another country as a citizen of the US or a resident alien. This applies to taxes on income, wages, dividends, interest, and royalties you pay in a foreign country.

This tax credit can be used to remove your US tax liabilities on a dollar-to-dollar basis, with the maximum amount of credit you can claim depending on your worldwide income and taxes already paid.

The rules to qualify for the Foreign Tax credit are:

• The tax must be imposed on you
• You must have paid or accrued the tax
• The tax must be the legal and actual foreign tax liability
• The tax must be an income tax (or a tax in lieu of an income tax)

Will my Canadian benefits apply in the US?

Canada has certain tax-advantaged savings plans that allow your savings to be legally exempt from taxation either through tax-deferred or tax-exempt accounts. These include the Registered Retirement Savings Plan or RRSP and the Tax-Free Savings Account or TFSA. It is essential to understand how the IRS views these plans to remain compliant with tax laws.

Are RRSP contributions taxable in the US?

Income earned in an RRSP is not tax-deferred under the US Internal Revenue Code. Still, these accounts may receive tax-deferred status in the US through the Canada-U.S. Tax Convention. Eligible individuals can automatically qualify for the tax-deferred status on all income accruing in their RRSPs.

Are TFSAs taxable in the US?

Unfortunately, a TFSA does not retain its tax-free or tax-deferred status for US tax purposes. Income received or capital gains realized through a TFSA must be reported on a US income tax return.

Additionally, your TFSA contribution and income must also be included in your FBAR filing as the IRS views it as a foreign trust with a US owner, requiring additional reporting requirements.

Conclusion

Given the complexities of tax laws, it is advisable for dual citizens to speak to a cross-border tax advisor to determine their tax liabilities and benefits they are entitled to. They can help develop a comprehensive tax plan that takes into account your unique circumstances and goals while ensuring compliance with the tax laws of both countries.