What Americans living in Canada need to know about filing taxes
Q: I just heard about an upcoming U.S. law that will penalize Americans who are residents of Canada for not having filed U.S. tax forms. I am an 80-year-old American citizen and Canadian resident for 50 years and I have always been told it was not necessary to file due to low income. I am quite concerned and would appreciate some clarification on this matter.
A: The short answer is yes; you must file a U.S. federal tax return, and maybe even a state tax return, in spite of having been in Canada the last 50 years. This has technically always been the case for U.S. citizens abroad but in recent years the IRS has become much tougher in enforcing filing rules for its expats, including those who mistakenly thought they were exempt because of low income. And unfortunately, depending on the rules of your home state, you may not be absolved from filing a state return.
If you have never filed U.S. taxes, you will likely have to submit at least three years retroactively as well as separate filings of the U.S. Treasury’s recently instituted informational form “TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)” that outlines foreign bank and investment accounts you currently own. The enforcement of these potentially onerous filing requirements is certainly bad news for the numerous Americans living in Canada, dual American/Canadian citizens and others considered potential U.S. taxpayers such as Green Card holders and non-resident owners of U.S. property, so it is not surprising that these developments are causing much concern among those finding themselves caught up in the IRS net.
The incoming legislation I believe you are referring to is the Foreign Account Tax Compliance Act (FATCA) requiring foreign financial institutions to report on the financial interests of their U.S. clients directly to the IRS as of Jan. 1, 2014 or suffer severe tax penalties. Fair or not fair, the U.S. is using whatever tools it can to get tough on large scale tax evasion and international money laundering.
The good news is the IRS is not out to unduly penalize globetrotting Americans. While not known for their benevolence, the IRS allows non-resident U.S. citizens an automatic two-month extension of the annual filing date from April 15 to June 15 with possible further extension to Oct. 15 upon completion of IRS Form 4868 (although any tax payable is still due April 15). With easy-to-use tax filing tools available online at a nominal cost or free for those with income under $57,000, there are fewer reasons not to file. Go to the IRS website at http://1.usa.gov/14zlU1xfor complete details on how to file as an expat U.S. citizen.
The IRS has also acknowledged the plight of long time non-filing Americans abroad in announcing a voluntary program allowing people to get up to date. According to the IRS website at http://1.usa.gov/1bXiS8T, taxpayers taking advantage of this procedure must file at least three years of delinquent tax returns, with appropriate related information returns and six years of delinquent FBARs. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns but no late filing penalties will be applied.
While it was difficult and expensive in the past to get even simple U.S. returns prepared in Montreal, the IRS crackdown has prompted local tax preparation offices to offer more U.S. tax filing services for Canadian residents. For low-income and straightforward tax situations, do contact any well-known American tax preparation company with Canadian offices, but if you need more complex tax and estate-planning advice, consult a professional tax accountant with the appropriate expertise in U.S. cross-border tax issues.