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Are you subject to US tax?


September 28th. 2015

 

The following Pennsylvania Department of Revenue video gives insight into the general US government mindset on delinquent tax filers.

 

Pennsylvania Department of Revenue Says 'Find Us Before We Find You'

 

In reality, very few Canadian residents are subject to significant amounts of US tax.  However, the recent introduction of the “Net Investment Tax” (to fund Obamacare) has increased the exposure to US tax for some Canadians.

 

On the other hand, the penalties for not filing the appropriate forms on a timely basis can be extremely onerous, regardless of whether there is any tax owing.

 

For example, there are “information returns” that must be filed to report ownership of Canadian mutual funds (Form 8621), contributions to or distributions from Canadian family trusts or RESP’s (Form 3520/Form 3520-A), ownership of Canadian private corporations (Form 5471), and signing authority on Canadian bank accounts or other financial assets with an aggregate value of more than $10,000 (FBAR).  Generally, these forms do not impact the calculation of your income tax liability.  However, many of these forms carry $10,000 failure to file penalties, which we have seen assessed.  One individual came to see us for advice after the IRS assessed a $10,000 penalty for each year he had failed to report his TFSA (to which he had contributed $200, simply to reduce his bank fees).

 

Who is subject to US tax filing?

 

If you were born in the US, or if one of your parents was born in the US, you are probably a US citizen.  US citizens are subject to US tax filing obligations regardless of where they live.

 

If you have ever had a US Green Card, and you have not formally relinquished your status, you are considered a US resident for tax purposes, and you are subject to US filing obligations.  An expired Green Card is the worst of both worlds – all of the obligations with none of the benefits!

 

Finally, if you spend significant time in the US (120 days per year on average), you may be considered to be a US resident, unless you file the appropriate forms to establish you are “more resident” in Canada than you are in the US.

 

What should you do?

 

If you think you may be subject to US filing requirements, contact our tax team.  We have extensive experience with cross-border filings, including voluntary disclosures for income tax, FBAR (Report of Foreign Bank and Financial Accounts), Form 5471 (Information Return of US Persons with respect to Certain Foreign Corporations), Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company – such as a Canadian mutual fund), and Forms 3520/3520-A (Annual Return to Report Transactions with Foreign Trusts/Annual Information Return of Foreign Trust with a US Owner).


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