Update for US Citizens in Canada

The US Internal Revenue Service (IRS) recently posted a fact sheet “Information for US Citizens of Dual Citizens Residing Outside the US” to provide clarification of its rules.

US Citizens and dual citizens living abroad are all required to file US federal tax returns and report foreign bank and financial accounts (FBARs).  They also face stiff penalties for failing to report and failing to pay outstanding taxes.

As Jamie Golombek of CIBC writes, in “The IRS, Expats and “Reasonable” the IRS is providing some relief on penalties if it determines that late filings are a result of “reasonable cause.”   Reasonable cause is determined “based on a consideration of the facts and circumstances.  Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them.”  The IRS will consider all information, including:

• Reasons given for not meeting tax obligations
• Compliance history
• Time passed before subsequent complicate
• Circumstances beyond the tax payer’s control

Furthermore, reasonable cause may be established if you show that you were not aware of your obligations.  Determining reasonable cause is a subjective determination made by IRS, therefore, the fact sheet is not likely to provide the peace of mind you will get in knowing you are in compliance as you will not be able to predict how they will interpret your situation. For more on how to handle the finances of your business, check out this spend management tips.

What is clear is that the relief provided does not relieve a US citizen or dual citizen of his or her obligations.  However, if you just found out that you are not incompliance and you are late in filing, you may have some relief in the “reasonable cause argument”.

Ensuring that your filings and taxes are current is the appropriate action.  Our previous recommendation holds:  US Citizens living in Canada should speak with a cross border tax specialist holds.

Furthermore, we have recommended that the federal government add the Registered Disability Savings Plan to the agenda the next time the Canada US Tax Treaty is reviewed.  The RDSP should be exempted so that income earned in RDSPs and income received from RDSPs is not taxable in the United States for American RDSP beneficiaries living in Canada.