U.S Taxes for Canadians

Rumley Holmes LLP provides professional cross-border tax and accounting services to ensure your taxes are filed properly and on-time. This includes the following:

  • Personal taxes
  • Corporate taxes
  • Rental Income from US properties
  • Sale of US properties
  • Estate taxes

U.S Tax Issues for Canadians

In the United States, the income tax system is based on either citizenship or residence. In Canada, taxation occurs on residency. Canadians living or working in the United States may find themselves taxed on their “world income” in both Canada and the U.S.

The U.S. tax system, administered by the IRS, is complex with many compliance and reporting requirements quite different from the Canadian system, administered by the CRA.

Rumley Holmes LLP has the expertise in both the U.S. and Canadian tax systems to help you deal with these complexities

Other Topics:

The Canada/U.S Tax Treaty

The Canada-United States Income Tax Convention and other amending protocols are intended to prevent “double taxation” and enhance cooperation between the two countries. The 5th Protocol to the convention was designed to:

  • Eliminate source-country “withholding” tax on cross-border interest payments
  • Allow tax payers arbitration to otherwise unsolvable double taxation issues
  • Ensure that there is no double taxation on immigrant gains

While the convention may provide for certain tax exemptions, this does not include exemption from filing income tax returns in the U.S. Failure to file as prescribed in the U.S. can result in the exemptions sought being denied by the IRS and other penalties being imposed.

What is the FBAR?

FBAR stands for “Foreign Bank Account Report”
Under US law the Department of Treasury has the authority to establish record keeping and reporting requirements for United States “persons” with a financial interest, signatory authority, or other authority over a financial account maintained with financial institutions in a foreign country. A US “person” that has a financial interest in, control over, has signing authority for, or authority to control the disposition of a foreign bank or financial account(s) that total in aggregate more than $10,000 USD at any time during a calendar year must file Form 114 with the IRS by June 30 of the following year.

Beginning in tax years after December 31, 2015, the due date will be changed from June 30th to April 15th; however, the Form 114 will be eligible for a maximum extension of up to a 6-month period for a timely filed extension.

Definition of a United States Person

A “United States person” is:

  • A citizen or resident of the United States.
  • A domestic partnership.
  • A domestic corporation.
  • A domestic trust or estate.

Purpose of the FBAR

The FBAR rules were established to provide investigators with leads and information required to track down and prosecute criminal activity, tax evasion, money laundering, and international terrorist activities. In addition to tracking illicit funds and unreported income, the information provided is invaluable to intelligence and counterintelligence analysts to protect against international terrorism.

Who Must File the FBAR

A United States “person” must file an FBAR report if that person has financial interest in, signature authority, or other authority over any financial account (s) in a foreign country and the aggregate value of these account(s) exceeds $10,000 USD at any time during the calendar year.

The account value is the largest amount of currency and/or monetary instruments that appear on any quarterly or more frequently issued account statement for the applicable year. If a periodic account statement is not issued, the maximum account value is the largest amount of currency and/or monetary instruments in the account at any time during the year.

Foreign financial accounts include the following accounts:

  • Bank accounts (savings accounts, checking accounts, and time deposits)
  • Securities accounts (mutual funds, brokerage accounts, and securities derivatives or other financial instruments accounts)
  • Accounts where the assets are held in a commingled fund that is a mutual fund.
  • Any other account(s) maintained in a foreign financial institution or with a person doing business as a financial institution, and are located outside of the United States proper and its territories and possessions.

FBAR Definitions

Financial interest includes accounts for which the U.S. person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non-United States persons. Financial interest also includes accounts where the owner of record or holder of legal title is a person acting as an agent, nominee, or in some other capacity on behalf of a U.S. person.

Signature Authority includes a U.S. person that has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank or other person with whom the account is maintained.

Account Authority includes a person with other authority over an account that is able to exercise a power of disposition (make deposits or disbursements) that is comparable to a signature authority over an account by direct communication, either orally or by some other means to the bank or other person with whom the account is maintained.

Reporting Joint Accounts

If two persons jointly maintain an account, or if several persons each own a partial interest in an account, then each U.S. person has a financial interest in that account and each person must file an FBAR.

In cases where spouses have a joint interest in a bank or financial account(s) the spouse that files Form 114 should include the other spouse as a joint account owner in Part III of the FBAR. If the filer’s spouse has no interest in any other account(s) not jointly held with the filer that spouse need not file a separate FBAR but must sign the filer spouse’s FBAR.

If the filer’s spouse is required to file an FBAR for any account that is not jointly owned with the filer he or she must file a separate FBAR reporting all accounts including those owned jointly with the other spouse.

Record Keeping

FBAR records must be kept for a period of five years from the due date of the report (June 30 of the following year). Failure to keep the following records can result the application of penalties by the IRS.

  • Name maintained on each account.
  • Number or other designation of the account.
  • Name and address of the foreign bank or other person with whom the account is maintained.
  • Type of account.
  • Maximum value of each account during the reporting period.

FBAR Penalties

The following are the civil and criminal penalties that may be assessed by the IRS for failure to comply with FBAR reporting and record keeping requirements. Both Civil and Criminal Penalties may be imposed for the same infraction.

Negligent Violation.

Civil penalty: Up to $500
Criminal Penalty: N /A

Non-Willful Violation.

Civil penalty: Up to $10,000 for each negligent violation.
Criminal Penalty: N /A

Pattern of Negligent Activity.

Civil penalty: In addition to penalty for Negligent Violation not more than $50,000
Criminal Penalty: N/A

Willful Failure to File FBAR or retain records of account.

Civil penalty: Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.
Criminal Penalty: Up to $250,000 or maximum 5 years in prison or both.

Willful Failure to File FBAR or retain records of account while violating certain other laws

Civil penalty: Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.
Criminal Penalty: Up to $500,000 or maximum 10 years in prison or both.

Knowingly and Willfully Filing False FBAR

Civil penalty: Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.
Criminal Penalty: $10,000 or maximum 5 years in prison or both.

If you are a Canadian resident intending to buy a residential property in the United States it is important that you are aware of the following tax implications particularly if you intend to rent it for any period of time during the year.

A non-US resident owning a US residential rental property may elect either of the following options:

OPTION A: ELECT TO PAY A TAX EQUAL TO 30% OF THE GROSS RENTAL REVENUE.

This option makes little economic sense.

OPTION B: ELECT TO HAVE RENTAL INCOME TAXED ON A NET PROFIT BASIS.

In order to avoid the 30% gross revenue tax on your US property you must file form W8-ECI and provide a copy to the rental manager or person renting your property. The W8-ECI completed by the renter and all tax returns must be filed with the IRS within 16 months of the date the tax return was due.

If you elect to pay tax on a net profit basis you are required to file a US personal or corporate tax return to determine the amount of US tax owed. If you elect this option you will need to apply for a US tax identification number. (See information on obtaining an ITIN) The net rental profit on your US real estate is calculated as the gross rental income less ordinary and necessary expenses.

The following is a list of the common expenses that are allowed.

  • Auto and travel
  • Cleaning and maintenance
  • Commissions
  • Insurance
  • Legal and other professional fees
  • Management fees
  • Mortgage interest paid to banks
  • Other interest
  • Repairs
  • Supplies
  • Taxes
  • Depreciation

In the US, residential rental property is depreciated over 27.5 years on a straight-line basis. Unlike Canada, you must take depreciation expense on a US rental property.
If you fail to take depreciation on a US rental property the IRS will still deem it to have been taken at the time the property is sold.

If you intend to use a US residential rental property for personal purposes in any tax year you should be aware that this may have tax certain tax implications depending on the amount of time you use the rental property. These tax implications may have relatively little impact for a short vacation but residing in the US for a prolonged period can result in a non-resident being deemed by the IRS to be a US resident and taxed in the US on worldwide earnings. The formula for determining whether or not you are deemed to be a US resident is cumulative and includes time spent in the US over a three-year period.

If you intend to spend any significant amount of time in the US it is important that you contact Rumley Holmes LLP to determine if this may cause any unintended consequences. Our tax experts can assist you to file the necessary IRS forms to apply for exemption from deemed resident status on the basis that you have a closer connection to Canada.

This article has outlined some of the concerns with US federal regulations that a Canadian resident might face when purchasing a US property. You should be aware that each state has similar or parallel regulations. Unlike Canada, however, the US Government does not act as a tax agent for individual states nor are regulations consistent from state to state. Each state must be dealt with separately according to its own particular regulations.

The greatest problems arise from not knowing or not fully understanding US requirements and regulations. Even innocent mistakes may result in severe tax repercussions. Failure to comply with US tax requirements and deadlines can result in disallowance of expense deductions, monetary penalties, and even criminal prosecution.

If you intend to buy a house or purchase an investment property in the United States let Rumley Holmes LLP guide you through the labyrinth of US regulations and help you establish the necessary records to avoid future tax problems. Our cross-border tax experts can offer immediate guidance on the different federal and state regulations that may affect you and can also assist you to find qualified realtors, escrow agents, appraisers, property managers, and other professionals in the area you intend to purchase your US residential property.

Our experienced US Canada Tax accountants can also prepare all your ongoing cross-border tax filings to ensure that you can enjoy the worry-free ownership your US residential property.

BUYING US PROPERTY: A TAX GUIDE FOR CANADIANS

If you are a Canadian resident intending to buy a residential property in the United States it is important that you are aware of the following tax implications particularly if you intend to rent it for any period of time during the year.

A non-US resident owning a US residential rental property may elect either of the following options:

OPTION A: ELECT TO PAY A TAX EQUAL TO 30% OF THE GROSS RENTAL REVENUE.

This option makes little economic sense.

OPTION B: ELECT TO HAVE RENTAL INCOME TAXED ON A NET PROFIT BASIS.

In order to avoid the 30% gross revenue tax on your US property you must file form W8-ECI and provide a copy to the rental manager or person renting your property. The W8-ECI completed by the renter and all tax returns must be filed with the IRS within 16 months of the date the tax return was due.

If you elect to pay tax on a net profit basis you are required to file a US personal or corporate tax return to determine the amount of US tax owed. If you elect this option you will need to apply for a US tax identification number. (See information on obtaining an ITIN)  The net rental profit on your US real estate is calculated as the gross rental income less ordinary and necessary expenses.

The following is a list of the common expenses that are allowed.

  • Auto and travel
  • Cleaning and maintenance
  • Commissions
  • Insurance
  • Legal and other professional fees
  • Management fees
  • Mortgage interest paid to banks
  • Other interest
  • Repairs
  • Supplies
  • Taxes
  • Depreciation:In the US, residential rental property is depreciated over 27.5 years on a straight-line basis. Unlike Canada, you must take depreciation expense on a US rental property. If you fail to take depreciation on a US rental property the IRS will still deem it to have been taken at the time the property is sold.

If you intend to use a US residential rental property for personal purposes in any tax year you should be aware that this may have tax certain tax implications depending on the amount of time you use the rental property. These tax implications may have relatively little impact for a short vacation but residing in the US for a prolonged period can result in a non-resident being deemed by the IRS to be a US resident and taxed in the US on worldwide earnings. The formula for determining whether or not you are deemed to be a US resident is cumulative and includes time spent in the US over a three-year period.

If you intend to spend any significant amount of time in the US it is important that you contact Rumley Holmes LLP to determine if this may cause any unintended consequences. Our tax experts can assist you to file the necessary IRS forms to apply for exemption from deemed resident status on the basis that you have a closer connection to Canada.

This article has outlined some of the concerns with US federal regulations that a Canadian resident might face when purchasing a US property. You should be aware that each state has similar or parallel regulations. Unlike Canada, however, the US Government does not act as a tax agent for individual states nor are regulations consistent from state to state. Each state must be dealt with separately according to its own particular regulations.

The greatest problems arise from not knowing or not fully understanding US requirements and regulations. Even innocent mistakes may result in severe tax repercussions.  Failure to comply with US tax requirements and deadlines can result in disallowance of expense deductions, monetary penalties, and even criminal prosecution.

If you intend to buy a house or purchase an investment property in the United States let Rumley Holmes LLP guide you through the labyrinth of US regulations and help you establish the necessary records to avoid future tax problems. Our cross border tax experts can offer immediate guidance on the different federal and state regulations that may affect you and can also assist you to find qualified realtors, escrow agents, appraisers, property managers, and other professionals in the area you intend to purchase your US residential property.

Our experienced US Canada Tax accountants can also prepare all your ongoing cross border tax filings to ensure that you can enjoy the worry-free ownership your US residential property.

Selling U.S. Property for Canadians:

Non-residents of the U.S. are subject to U.S. income taxes if they dispose of U.S. real estate property. If any of the following pertains to your situation, we strongly advise you to meet with one of our accountants.

The Non-Resident Withholding Tax

If you are disposing of real property situated in the U.S., you are subject to a non-resident withholding tax of 10% of the gross sales price.

Reducing Your Withholding Tax Amount

You may make request to have the 10% non-resident tax withheld on the net capital gain on the disposition instead of the gross sales price by filing form 8288-B with the IRS and obtaining a withholding certificate.

U.S Tax Return Required When Selling U.S Property

You are required to file a U.S. tax return for the taxation year in which the disposition took place. If you are disposing of real property that you have been renting, you must have filed your U.S. tax returns reporting the rental income and expenses up to the date of disposition, and paid all of the tax due in order to avoid penalties and interest.

A U.S Property Interest Includes the Following:

  • Direct ownership of U.S. real estate, including land improvements and leaseholds, and personal property associated with the use of the real property.
  • Ownership of shares of a U.S. corporation in which more than 50% of the fair market value of its United States real property interests equals or exceeds 50 percent of the total real property interests and any other assets used in a trade or business.

The purchaser is required to withhold the tax from the gross sales proceeds and remit it to the IRS within 20 days of the closing, along with Forms 8288 and 8288A. Penalties and interest will be charged on late filed Forms 8288. There is a penalty of up to $10,000 over the tax for a willful failure to collect and pay.

No Tax Withholding Required

The withholding requirement is eliminated if the purchase price of the property is under $300,000 and the purchaser intends to use the property as a personal residence.

Rumley Holmes LLP Can Help You:

  • File your U.S. tax return reporting the disposition of the property
  • Reduce your non-resident tax withholding at source by applying for a withholding certificate File the necessary rental returns (if any) to bring you current with your filing obligations

Taxes from Rental Income: Canadians Receiving Rent on U.S Property

What needs to be filed, with whom and by when? Not knowing the answers can be costly and may mean missing deductions or being subject to a 30% withholding tax

Rental Income and Non-Resident Tax

If you are receiving rental income from real property situated in the U.S., you are subject to a non-resident withholding tax of 30% of the gross rental income.

Your withholding agent is required to provide you with Form 1042-S, detailing the amount of gross rental income received and the amount of non-resident tax withheld. Form 1042-S must also be filed with the IRS.

You may elect to file a U.S. tax return and pay tax on the net rental income at the graduated rates, which is usually more beneficial. The rental return must be filed in a timely manner in order for the election to be valid.

Eliminating Your Withholding Tax from Rental Income

You may eliminate your non-resident tax withholding at source by advising your tenant that you have elected to file a U.S. tax return and by providing them with Form W-8ECI. You will need a U.S. tax identification number in order to make this election

Tax Return Filing Requirement for Canadians Receiving U.S Rental Income

You must file a U.S. tax return if you have not had non-resident tax withheld. If you do not file the tax return within the specified time period, the IRS will disallow all deductible expenses as well as any related loss carryovers. In addition, the IRS will assess penalties for late filing and underpayment of tax.

Eliminate the Guesswork, Call Rumley Holmes LLP for Professional Assistance With:

  • Filing the necessary rental returns to help you minimize your tax liability
  • Reducing your non-resident tax withholding at source
  • Accurately preparing the appropriate forms on behalf of your agent

What Rumley Holmes Needs to File Your U.S Taxes

The following information is intended to assist our clients to understand the documents and information that are required by Rumley Holmes LLP to prepare your US income tax returns and other information filings required by the IRS. The sooner and more completely that we receive this information, the more efficiently our cross border tax specialist can process your US returns and the more you will save.

U.S Income Tax on Rental Property

A Canadian resident who owns a residential property in the United States that has been rented to another party for any part of the tax year must elect one of the following two options:

Pay a tax equal to 30% of the gross rent.
Pay tax on the net rental profits.

If you elect the first option your rental agent will probably withhold the tax and forward it directly to the IRS and you are not required to file a US tax return. If you do not have a rental agent you must forward the tax yourself within 20 days of receiving the rent or 20 days after the end of each quarter as determined by the IRS. You are required to file form 1042-S by March 15 of the year following the tax year. Failure to forward the required monthly or quarterly tax installments to the IRS or failure to file form 1042-S can result in severe financial and criminal penalties. The maximum fine for this offense is $100,000.00 US.

If you are a Canadian resident that owns a US rental property and have elected to pay tax on the net rental profit you must file a United States income tax return. You must also file a United States income tax return if you have been deemed to have a substantial presence in the US (substantial presence test) or if you possess a US green card or have applied for a green card (green card test). Additionally, you must file a US income tax return for the tax year in which you have sold a US residential property.

If you are deemed to be a US resident by way of having a substantial presence in the US, the IRS requires that you pay US taxes on your worldwide earnings. It is always a good idea to avoid this situation. Visit our blog posting entitled “Snowbirds Beware” for additional information.

U.S Income Tax on FDAP Income

Every foreign person that receives source income in the United States that is defined as Fixed, Determinable, Annual, or Periodical (FDAP) income is subject to a 30% tax (or lower treaty rate if applicable). The FDAP tax applies to the gross amount of U.S. source fixed or determinable, annual or periodic gains, profits, or income.

  • Income is fixed when it is paid in amounts known ahead of time.
  • Income is determinable whenever there is a basis for figuring the amount paid.
  • Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals.
  • Income can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased.

Examples of FDAP Income

Deductions are not allowed against FDAP income. The IRS has designated the following items as examples of FDAP income:

  • Compensation for personal services
  • Dividends
  • Interest
  • Original issue discount
  • Pensions and annuities
  • Alimony
  • Real property income, such as rents, other than gains from the sale of real property
  • Royalties
  • Scholarships and fellowship grants
  • Other grants, prizes and awards
  • A sales commission paid or credited monthly
  • A commission paid for a single transaction
  • The distributable net income of an estate or trust that is FDAP income, and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary
  • A distribution from a partnership that is FDAP income, or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner
  • Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease
  • Prizes awarded to nonresident alien artists for pictures exhibited in the United States
  • Purses paid to nonresident alien boxers for prize fights in the United States
  • Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States

The 30% FDAP does not apply to income or gains from U.S. sources that are effectively connected with a U.S. trade or business owned by a non-resident alien.

Rumley Holmes LLP Can Help

You may qualify to file a US income tax return that may reduce the amount of US tax that you have paid by way of a tax treaty or your presence in the US. Let the cross-border tax experts at Rumley Holmes LLP review your tax files to determine if you qualify for a tax refund or if you are entitled to a tax set-off under the provisions of the Canada-US Tax Treaty. Our cross-border tax specialists will assist you to file all required IRS and individual state forms and tax returns to ensure that you have received the lowest tax rate possible.

Penalties are Applied for Failing to File U.S Income Tax Returns on Time

Taxpayers subject to US taxes should be aware that there are substantial penalties for late filing or failing to file US tax returns. In fact the IRS can levy a penalty for an inadvertent mistake made by a taxpayer in preparing his income tax return or simply failing to attach a required schedule or form. We recommend that you have a tax expert review your US tax return before you submit it to the IRS. The Rumley Holmes LLP cross border tax experts will review your tax returns and assist you to accurately prepare and file all required returns and supporting documents to ensure that you enjoy the most pleasant and worry free experience possible. Our expert tax accountants will handle all your tax requirements accurately and timely at reasonable cost.

Information Requires to File a U.S Income Tax Return

The Rumley Holmes LLP cross border tax specialists will require the following information contained in our tax checklists below order to prepare and file your US income tax returns:

US 1040 Organizer

US 1040NR Rental Organizer (for non-U.S. individuals with U.S. rentals)

The more complete the information provided, the more efficiently our cross-border tax specialists can prepare your IRS returns.