New Tax Risks For Dual Citizens Living In Canada

written on behalf of Feigenbaum Law

COVID-19 has brought with it many extensions to tax-related obligations for both Americans and Canadians. However, it doesn’t mean that tax obligations have gone away entirely. One item that has been a contentious topic over the last few years is the requirement for US/Canadian dual citizens living in Canada to file income tax in the United States as well as Canada. We wanted to take this opportunity to remind dual citizens of their obligations to file US taxes as well as update our readers on how the IRS is pursuing those who fail to do so.

Citizenship-Based Taxation

Most countries, including Canada, tax people based on residency. This means that if you are a Canadian citizen, but live and work in a different country, you are exempt from having to file Canadian taxes. However, this is not the case in the United States. Instead, the United States is one of the only countries in the world that taxes on the grounds of citizenship rather than residency. This means that an American citizen living in Canada, including dual citizens who may have never lived in the United States at all, are required to file US tax forms even if they don’t have to pay tax there.

This has been a point of contention for the large number of US citizens living in Canada. In 2016 the US government estimated there were over 825,000 of its citizens living in Canada. While some moves have been made to exclude people who don’t actually live or work in the United States, no real relief has been made available yet.

Social Security Numbers and Bank Accounts

An article published by the CBC explained that changes to the U.S. Foreign Account Tax Compliance Act (“FATCA”) came into place this year requiring Canadian banks to alert the US government if bank accounts owned by clients who are US citizens do not have social security numbers attached to them. Banks have always had the obligation to provide the US government with this information and per an agreement negotiated under Prime Minister Harper, the CRA was tasked with collecting this information to provide to the IRS. However, there was a grace period in place that expired in early 2020. By collecting social security numbers associated with Canadian bank accounts, the IRS will be able to determine who has not reported those accounts. Additionally, if they discover that a US citizen has not provided a social security number because they don’t have one, the IRS will know that the person has never filed their US tax forms, as a social security number is required to do so.

The CRA reserves the right to levy fines for non-compliance on any Canadian financial institution. As a result, the article warns that Canadian banks might decide to close accounts owned by US citizens rather than collect the information. Going forward, banks may also refuse accounts to applicants with US citizenship who fail to provide the required information.

There is Time to Make Good on Tax Obligations

While filing US taxes may be burdensome for Canadians, the IRS has offered olive branches in the past for those willing to make good on old obligations. There had been a streamlined procedure available that allowed people to escape penalties. However, this has been replaced by a new program, which offers some relief, though not as much as has been previously made available.

International taxation involving Canada and the United States can be incredibly complicated. At Feigenbaum Law, we offer a wide range of services in this highly niche area, including corporate tax planning and compliance, personal tax planning and compliance, immigration & visa services, cross-border estate planning and services related to tax controversy. To learn more about how we can help you, or to make an appointment, contact us online, or call our office toll free at (877) 275-4792.