Complications concerning US and Canadian Tax Laws

The Canada and United States each has very distinctive systems of taxation. The rules on cross-border taxation between the two nations are covered in Article XXIV of the US – Canada Income Tax Convention, 1980 (Treaty). Both countries sign the Tax Treaty. This treaty ensure residents of the two countries not taxed on the same income in the same year. Filing US taxes in Canada is no easy task. Residents from both countries are faced with challenges determining the US and Canadian tax laws.

Cross Border Tax Services
Cross Border Tax Services
  • Tax obligations

The US Foreign Account Tax Compliance (FATCA) became Canadian Law, has become part of the 2014 federal budget. FATCA requires Canadian financial establishments to send information of their US account holders to the Canada Revenue Agency, will send the data to the Internal Revenue Services (IRS). Overdue tax returns should be a priority to avoid penalties and the IRS chasing you.

  • Dual Citizenship and Taxes
The CRA reviews information on your residential ties to Canada. Canada Revenue Agency (CRA) have guidelines and interpretations on the subject, your place of residency, length of stay in Canada and a number of other factors to make its summary. Based on that result, you could be taxed or not. Obligations of Canadian taxation are based on residency status.
If you are a citizen of another country problems usually arise, like the U.S., and classified as a Canadian resident or with dual Canadian citizenship. Regardless of their country of residency they are taxed based on their worldwide income.  Residents of both countries get provisions and relief because of the tax treaty, so they pay in one country and receive credit in the other for the taxes paid.
  • Investments

Investments are tax-free that grow within their accounts. Many Canadian residents have been investing in Registered Education Saving Plans (RESPs) and Tax Free Savings Account (TFSAs). These investments can be costly for U.S. tax purposes and do not provide the tax benefits under U.S. tax rules that do under Canadian tax rules. They do not get special treatment under U.S. domestic tax law or under the Canada – U.S. Income Tax Convention, which is why, the income generated by these accounts is taxable to the investor.

Another complication is that IRS considers RESPs to be foreign trusts, which means individuals must need to file IRS Forms 3520 and 3520A on an annual basis. Foreign trusts returns are complicated to prepare and compliance to these can become very costly.

For those with financial circumstances like filing taxes in Canada, there are quite a number of distinguished cross-border tax team who specializes in these scenarios. Paying US taxes in Canada, despite complications, can be very beneficial. It actually guarantee you a good record of paying your taxes. US taxes in Canada, in addition, are protected by the rules of the treaty so it doesn’t have to be too difficult.

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