U.S.A. & Canadian Tax Services
Taxes in the United States can be incredibly complicated. This situation becomes compounded when you are a resident in another country due to the potential for double taxable or unfavourable tax events as a result of poor planning.
The United States has entered into tax treaties with many countries around the world (Canada included) to attempt to minimize the situations where these occur. Other treaty provisions deem certain types of income non-taxable or limit taxation in the United States (or the treaty country) even if the money came from the United States.
Additional complications can exist for United States taxpayers holding certain Canadian investment vehicles such as an Registered Education (or Disability) Savings Plan, a Tax Free Savings Account, shares in a non-U.S. Corporation, creators or beneficiaries of non-U.S. trusts to name a few.
It is because of these reasons (and many more) that you can quickly experience the benefits of working with a qualified United States tax professional. As an Enrolled Agent and U.S. citizen, I am passionate about helping individuals minimize their exposure to taxes in both the United States and Canada while maximizing the benefits awarded under the U.S./Canada Income Tax Treaty.
Being a U.S. Citizen living in Canada, my focus when preparing cross border taxes is:
Utilize the relevant provisions in the Canada – United States Income Tax Treaty to result in the maximum benefit allowed such as:
- Tax rate limits based on types of income derived from the US
- Exclusion of certain types of income and exemption from applicable taxes
- Elimination (or limiting) of withholding tax from certain US Sourced Income
Coordinate a plan that minimizes unnecessary exposure to risks due to differences in tax codes. For instance:
- Structuring share capital or investment portfolios to circumvent often punitive tax laws [Passive Foreign Investment Company (PFIC)]
- Outlining considerations to make when setting up a foreign trust, RESP or TFSA to avoid complicated grantor trust rules
- Discussing the effect of differing tax laws surrounding depreciation of capital and passive losses
- Timing of investment transactions to avoid unfavorable U.S. tax rate on capital gains
- And many more…
Minimize situations where differences in tax codes results in non-taxable Canadian income becoming taxable in U.S. such as:
- Certain types of investment income
- Potential for income distributed to another individual becoming taxable to the taxpayer (limiting the right to offset)
- Other recognized Canadian tax deferral vehicles
Personal U.S. Tax Returns
PERSONAL TAX RETURN 1040
Except in limited circumstances, tax returns are required annually by all U.S. citizens or resident aliens. In many instances, where there is no income from the United States, these filings do not result in any taxes owing to the United States. This is due to the ability to offset U.S. taxes with taxes paid in Canada and the tendency for Canadian tax rates to be higher than the U.S. Certain benefits, such as the foreign earned income exclusion or other various provisions within the Canada – U.S. Tax Treaty can prove quite beneficial to U.S. Citizens as well.
In addition to the traditional income tax filings, there are additional informational reporting requirements that may be required. Examples of this include contributors and/or beneficiaries of foreign trusts, certain owners of foreign corporations and Foreign Bank Account Reports.
Over the years, the U.S. has ramped up their enforcement of the requirement to file a tax return for U.S. citizens living abroad. This has been done through legislation such as FATCA increasing their ability to obtain personal tax information on U.S. Citizens from countries around the world. Recently, the IRS was granted powers to withhold passport renewals for U.S. citizens with tax debts exceeding $50,000. As such, compliance has become more important than ever.
NON-RESIDENT TAX RETURN 1040NR
A Non-resident tax return is required for any person with U.S. sourced income who is not a resident or citizen of the U.S.. This can come about for a variety of reasons such as:
- Sale of real property
- Operating of a vacation rental property
- Pension/Annuity/Royalty income
- Trust/Estate Income
In some instances, taxes may be withheld from the income you receive from the U.S. to cover taxes owing upon filing. Despite these withholdings (in many cases) covering your tax liabilty, the Canada Revenue Agency expects you to file a U.S. tax return to establish the right to offset your Canadian tax liability. Careful consideration should be paid when completing your W-8BEN as the U.S. withholds refunds for a minimum of 180 days from the later of June 15th (in year of filing) or when the return is actually filed. Donovan can assist in determining the correct withholding percentages under the Treaty and completion and filing of the W-8BEN form.
Although, as a non-resident, you are not entitled to a standard deduction, specific income is given preferential tax treatment in the U.S. Also, certain expenses incurred in order to produce this income may be eligible to be deduct. Donovan works with each client, ensuring all relevant deductions are explored.
U.S. Business Tax Returns
In the United States, a corporation can take on many forms. A traditional corporation is taxed under the corporate tax rate but can elect to be an S-Corporation (benefits discussed below). Whereas, an LLC is taxed as a partnership but can elect to be treated as a corporation.
As a traditional corporation, all earnings are taxed first inside of the corporation and then again when distributed to it’s shareholders by way of dividends. This double taxation has historically made traditional corporate structures undesirable for smaller, privately held companies. Despite the reduction of corporate taxes as a result of the Tax Cuts and Jobs Act of 2017, the issue of double taxation still remains.
For eligible corporations, election as an S-Corp can have very favourable impacts. This is due to the fact that, similar to a partnership, all earnings inside of an S-Corporation are only taxed at the shareholder level. Not only does this eliminate the issue of double taxation, but also allows the shareholder to benefit from a lower margin tax rate than the 35% tax historically imposed on earnings inside of a United States corporation.
Each structure comea with their own unique reporting requirements and regulations. By working with a qualified United States tax professional, you can rest easy knowing you are compliant and positioned to avoid traditional pitfalls, can stay abreast on changes in the respective tax legislation and minimize your taxes.