US Tax Filing
With regards to US tax filing, in recent years, the US government has been increasing its focus on non-compliant US citizens living abroad, and also on non-resident persons who spend more than 120 days per year in the US.
Failure to comply with US tax filing requirements can be costly as penalties add up quickly.
Canadians who are non-US citizens and spend more than 120 days per year, but less than 182 days per year, in the US are considered “non-resident aliens” for US tax purposes.
Non-resident aliens must file a non-resident US income tax return, but also have the option to file Form 8840 “Closer Connection Exception Statement for Aliens”, which eliminates the requirement to report their worldwide income for US tax purposes. The US tax filing deadline for non-resident US tax returns, along with Form 8840, is June 15.
Canadians who are non-US citizens, but who spend more than 182 days per year in the US, are considered “resident aliens” for US tax purposes. Resident aliens must file US income tax returns. Similarly, the substantial presence test is also met when Canadians are present in the U.S. for at least 31 days in the current year and the sum of the following totals at least 183 days:
- total days in the U.S. in the current year (e.g. 2014), plus
- 1/3 of days in the U.S. in the prior year (e.g. 2013), plus
- 1/6 of days in the U.S. in the second preceding year (e.g. 2012).
Even if you only spend 4 months a year in the US, you might be considered a resident alien based on this test! There are exceptions, however. We’ve outlined these below:
- Closer Connection Exception – as long as you have not been in the US more than half the current year, you can file Form 8840 (as mentioned above) to state a closer connection to another country – like Canada!
- Specific Exemptions – there are some reasons for being in the US that are specifically excluded:
- Certain classes of visas for teachers, trainees and students
- Professional athletes competing in charitable sports events
- Being unable to leave due to a medical condition that arose in the US. This requires filing form 8843.
- Treaty Exemptions – if you are also considered the resident of another country (again, like Canada!), you can file form 8833 to override US residency. Note that this will reduce or possibly eliminate some taxes, but filing is still required.
The determination of US citizenship can also be quite complex. Any person born in the US is considered a US citizen. However, persons born outside the US may also be considered a US citizen if both parents are US citizens, or even if one parent is a US citizen. If you are unsure about whether you are a US citizen, you can refer to the American Citizen Abroad website (www.aca.ch) for assistance.
The US tax filing deadline for US tax returns is April 15.
The US is one of a handful of countries in the world whose tax system is based on citizenship rather than residency. As a result, any US citizen living in Canada must file a US income tax return and report their worldwide income on their tax return. There is a Canada-US tax treaty in place that eliminates much of the risk of “double tax”, but there are still certain circumstances where additional US taxes may result. Some of the more common and significant items include: RRSP’s, Capital dividends and principal residences but there are others as well. Give KWB a call if you would like more information.
Penalties for not filing the appropriate US tax returns can be substantial. If you have not completed your US tax filing for prior years, the US government has a voluntary disclosure program in place that allows you to file delinquent returns while limiting the amount of penalties that will apply. Filing delinquent returns without the use of the voluntary disclosure program is strongly discouraged by the US government, and there is no limit on the amount of penalties that may be applied. Note that regardless of the reason for requiring a US tax filing, the IRS will apply the same penalties and interest if you do not file or do not pay taxes owing.
- Failure to file penalty – 5% of unpaid tax per month, up to 25% of unpaid taxes.
- Failure to pay penalty – 0.5% of unpaid tax per month, with no ceiling
As you can see, this could add up quick!
There are also other consequences of not completing your US tax filing of your US returns. These include the fact that it is illegal, you may face increased questions and follow-up at Canada-US border crossings and the future potential for the Canada Revenue Agency to be able to enforce US tax liabilities.
If you need any advice in regards to your US tax filings, please contact our office and we can refer you to a US tax specialist. Additional information on US tax filings can be found at www.irs.gov.
Please note that this information is a simplified summary of the US tax filing requirements and should not be relied upon for completing US tax filings.
If you’re travelling to the U.S. you may already have U.S. property. If you have U.S. property, you may have to pay U.S. Estate Tax if you pass away while still owning your U.S. property. Here’s a simple calculator that estimates an Estate’s total tax payable based on the U.S. property and worldwide Estate value of the deceased taxpayer. The calculator can be found at: US Tax Calculator.
If you have any questions regarding U.S. Estate Tax, please contact us at 780-466-6204 and we can refer you to a US tax specialist.
Darren Buma, CPA, CA
Darren has a passion for small business and loves to work with both budding and experienced entrepreneurs. After articling with KPMG and receiving his Chartered Accountant designation, he left to explore the world of small business. What he was expecting to be a short exercise turned into nine years of excitement. During that time he helped to grow and operate a variety of private companies in both commercial real estate development and computer software development.
In 2004 Darren joined KWB so that he could have the best of both worlds, running a small entrepreneurial firm and being in a position to help entrepreneurs like you, grow your business and secure your future. He became a partner at KWB in 2007. His knowledge and advice isn't just academic, Darren lives the roller coaster of entrepreneurship that you ride every day.
Aside from his responsibilities at work, Darren is active in the community. He is a past Chair of the Edmonton Chapter of Financial Executives Canada, sits on the disciplinary tribunal roster for the Institute of Chartered Accountants of Alberta, and is active in minor hockey both as Treasurer for his local hockey association as well as coaching numerous hockey teams over the years.