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Are you a US citizen or US resident for tax purposes?

Are you a US citizen or US resident for tax purposes?

August 2, 2018 | Tax

Much has been written about the potential pitfalls for US citizens or US “residents for tax purposes” relating to their requirement to follow tax rules in both Canada and the US. This article should not be confused with Canadian residents and their requirement to report worldwide income in case they have US assets or income derived from the US or any other country. If you are a US citizen, or if you are a Canadian citizen but considered a US resident for tax purposes – you have filing requirements with the IRS. There are some generalities that I’d like to point out in this short post, however it is important to note that complex situations should always be reviewed with professional accountants and/or lawyers before taking action or advice on such matters.

Several years ago, the IRS opened an offshore voluntary disclosure program, allowing US taxpayers to come forward with previously unreported financial assets without criminal liability, that program is ending in 2018. As it relates to investors there are a couple of investment structures that have special filing requirements for US taxpayers: Foreign trusts and passive foreign investment companies (PFIC’s). If you own a foreign trust or a PFIC not only will you have special filing requirements, but you will likely have tax to pay in the US. The best advice is usually to avoid these structures.

What kinds of investments fall into these 2 categories? PFIC’s include mutual funds and ETF’s owned in non-registered accounts. If you have a non-registered account, it may be best to avoid these 2 types of investments. If they are held in a registered account (RSP, LIRA etc) then you are ok. Canadian holding companies are also considered PFIC’s, the advantages/disadvantages of having assets inside a holdco are beyond the scope of this article.

TFSA’s and RESP’s are considered foreign trusts. If a US taxpayer owns either of these types of investments, they will have special filing requirements and likely tax to pay as the US does not recognize the tax-exempt nature of these instruments in Canada. As a result, you should likely avoid these investments or have a non-US spouse own them as an alternative.

The moral of the story? If you are a US taxpayer you should seek professional advice, as there are tax consequences that you need to be aware of.

~ Rajeev

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