PPR Ottawa ?

[WaterDad]

I've found that the cost can be rather high - quotations I received for my personal return ranged from $10-30k. I decided to do my own for that amount, so I've become increasingly familiar with how much worse they keep making the US tax code for expats.

The Canada/US tax treaty is quite important. One thing I recently learned is that under US law the proceeds of your life insurance paid to someone outside the US (like a Canadian spouse) who is not subject to US taxation is subject to a 30% withholding. Under the terms of the Canada/US tax treaty you can file a W-8BEN form and claim a tax treaty benefit, reducing that amount down to zero. There are other oddities - like if you take a premature withdrawal from a US IRA and live in Canada, the 10% penalty will count as a foreign tax for Canadian tax purposes, which effectively means you don't pay a penalty in almost all cases.

Oh, and I'd avoid Canadian TFSA's (10 pages of paperwork per TFSA account and it's not tax free under US tax law.) Canadian RRSPs are not so bad - that's a one page form. But only for Canada. Any other country with an IRA/401(k)/403(b) equivalent and you're filling out the 10 page informational return.

My favourite question: if you have an account with Ally Canada, is it a foreign bank under US law? Remember, it's 78% owned by the US Treasury.

If you REALLY want to make things difficult, try living in Canada with a same-sex spouse. How do you interpret the word "spouse" under the treaty? Pursuant to Canadian law or US law? Ah, the mind boggles.

The most expensive legal questions I've ever asked are about cross-border taxation. Last time I asked what I thought was a simple question it cost the company $12k.

Bingo. #1 reason we are considering cashing out our 403b's or rolling them over into IRA, then over to RRSP.

 

[santoki]

We are planning to leave my wife's US account open in order to pay/receive taxes for 2012, but what obligations does she have to pay tax to the US going forward? If she's not a resident there and not planning to be one, do we still have to continue to file taxes for the rest of her life? Or can she claim to be a non-resident and be exempt from paying any taxes?

 

[computergeek]

We are planning to leave my wife's US account open in order to pay/receive taxes for 2012, but what obligations does she have to pay tax to the US going forward? If she's not a resident there and not planning to be one, do we still have to continue to file taxes for the rest of her life? Or can she claim to be a non-resident and be exempt from paying any taxes?

Is she a US Citizen? If so, she has an ongoing obligation to comply with US tax law. The US is distinctly different than Canada - it taxes you on your world wide income regardless of your place of residence. Generously, it allows you to offset taxes paid to other jurisdictions. However, there are numerous arcane requirements, including filing a TFAR if you have signatory authority over someone else's account (e.g., if you owned your own business) or if the aggregate balance in your own accounts exceeds US$10,000 per year. The penalties for failing to properly file the TFAR each year are onerous and can outstrip the value of the account rather quickly.

Estate tax planning is another complex area. If her estate is worth less than US$1,000,000 then she's fine (it's US$5 million until 31 December, but the changes to estate taxes that come into effect on 1 January 2013 are part of that "fiscal cliff" thing they're arguing about - and I hope she doesn't die before January 1!)

It's actually not the tax payments that turn out to be the painful part - it's the information returns. The US is so convinced they're being scammed - and they are - they have created these draconian information return forms 3520, 5471, 8891 and the new 8938 have almost nothing to do with income tax and everything to do with information (3520 and 5471 can lead to potential taxation, but unless you have a trust account - like a TFSA or RESP - the 3520 won't apply and unless you have your own corporation - like a family business - 5471 won't apply. 8891 is for RRSPs and 8938 is for anything else she might have that's worth $200k or more.) But these forms apply to people who aren't scamming the system and frankly don't have the financial means to do so.

Of course, the real way the US is being scammed is by allowing people to set up complex tax shelters (e.g., Mitt Romney) overseas that allow very rich people to pay little or nothing in tax.

Her children will be American by descent as well (at least under current laws) and thus will have the same requirements. That's where those draconian penalties (in some cases 50% of the account balance per year or $10,000 for a missing FBAR, up to 7 years back...) Imagine a 350% penalty simply because you didn't file a document you didn't even know you HAD to file. There are forgiveness clauses in the regulations, but you owe the money, they just choose to forgive some of it.

 

[santoki]

Is she a US Citizen? If so, she has an ongoing obligation to comply with US tax law. The US is distinctly different than Canada - it taxes you on your world wide income regardless of your place of residence. Generously, it allows you to offset taxes paid to other jurisdictions. However, there are numerous arcane requirements, including filing a TFAR if you have signatory authority over someone else's account (e.g., if you owned your own business) or if the aggregate balance in your own accounts exceeds US$10,000 per year. The penalties for failing to properly file the TFAR each year are onerous and can outstrip the value of the account rather quickly.

Estate tax planning is another complex area. If her estate is worth less than US$1,000,000 then she's fine (it's US$5 million until 31 December, but the changes to estate taxes that come into effect on 1 January 2013 are part of that "fiscal cliff" thing they're arguing about - and I hope she doesn't die before January 1!)

It's actually not the tax payments that turn out to be the painful part - it's the information returns. The US is so convinced they're being scammed - and they are - they have created these draconian information return forms 3520, 5471, 8891 and the new 8938 have almost nothing to do with income tax and everything to do with information (3520 and 5471 can lead to potential taxation, but unless you have a trust account - like a TFSA or RESP - the 3520 won't apply and unless you have your own corporation - like a family business - 5471 won't apply. 8891 is for RRSPs and 8938 is for anything else she might have that's worth $200k or more.) But these forms apply to people who aren't scamming the system and frankly don't have the financial means to do so.

Of course, the real way the US is being scammed is by allowing people to set up complex tax shelters (e.g., Mitt Romney) overseas that allow very rich people to pay little or nothing in tax.

Her children will be American by descent as well (at least under current laws) and thus will have the same requirements. That's where those draconian penalties (in some cases 50% of the account balance per year or $10,000 for a missing TFAR, up to 7 years back...) Imagine a 350% penalty simply because you didn't file a document you didn't even know you HAD to file. There are forgiveness clauses in the regulations, but you owe the money, they just choose to forgive some of it.

I need to speak with my accountant...

 

[tavora]

Oh, and I'd avoid Canadian TFSA's (10 pages of paperwork per TFSA account and it's not tax free under US tax law.) Canadian RRSPs are not so bad - that's a one page form. But only for Canada. Any other country with an IRA/401(k)/403(b) equivalent and you're filling out the 10 page informational return.

Thank you for sharing this information, Computergeek! I had no idea. I had thought when my husband was here and settled we'd contribute to a TFSA for him, but if it's going to cause huge paperwork hassles when he files his US taxes, we'll be thinking again - maybe just stick to RRSPs then.

 

[lunas]

I'm sorry I'm kinda dumb. I had to read Computergeek's post a few times and I still don't understand. I am American, so if I were to move to Canada and find a job, I have to pay taxes over my income to the US still? How about the taxes I would be paying to my Canadian province and goverment, isn't that enough proof that I am a tax payer in my place of residence? :-X

 

[computergeek]

I'm sorry I'm kinda dumb. I had to read Computergeek's post a few times and I still don't understand. I am American, so if I were to move to Canada and find a job, I have to pay taxes over my income to the US still? How about the taxes I would be paying to my Canadian province and goverment, isn't that enough proof that I am a tax payer in my place of residence? :-X

The issue is not paying taxes, the issue is filing a return - even if no tax is due. If you haven't filed your returns it can cause problems renewing your US passport.

Suppose you won Lotto Max here in Canada. My advice to an American: give the ticket to your Canadian spouse/partner. If a Canadian wins the lottery, there is no tax on it. If an American wins the lottery there is no Canadian tax on it, but the US will tax it. So that $50 million? Figure you'll give the US ~35% of it ($17,500,000). Ironically, Canada will then give you everything you paid (to Canada) back, since the tax you paid to the US is a foreign tax credit on your Canadian taxes.

 

[WaterDad]

I'm sorry I'm kinda dumb. I had to read Computergeek's post a few times and I still don't understand. I am American, so if I were to move to Canada and find a job, I have to pay taxes over my income to the US still? How about the taxes I would be paying to my Canadian province and goverment, isn't that enough proof that I am a tax payer in my place of residence? :-X

From what I understand, and anyone please correct me if I am wrong:

Basically, maybe on paying taxes back to US on Canadian income. But you HAVE to file every year to the US. The taxes you pay in Canada are taken into account.

The IRS site is confusing FYI. For better language, I like this site http://www.expatnetwork.com/Money/Expat-Tax/FAQs-for-American-Expats.cfm ( I am not affiliated with this site.)

Edit: I see computer geek already responded!

 

[computergeek]

The IRS site is confusing FYI. For better language, I like this site http://www.expatnetwork.com/Money/Expat-Tax/FAQs-for-American-Expats.cfm ( I am not affiliated with this site.)

The IRS site is confusing, but has a wealth of information (too much, which reflects the reality of the US tax code).

US tax software actually does pretty well with most of these issues (I use TurboTax) - until you need one of those forms I mentioned, then it directs you to the IRS site. If you have to submit a 3520 or 5471 you have to submit a paper return.

Here's a good post about FBARs and 3520s (or 8891 for Canadian RRSPs): http://www.irs.gov/uac/IRS-Announces-Efforts-to-Help-U.-S.-Citizens-Overseas-Including-Dual-Citizens-and-Those-with-Foreign-Retirement-Plans

They're definitely pushing to make people comply with all of this. There's also a new rule next year that foreign banks must report details of accounts by American account holders to the IRS. I've read articles - like this one http://www.forbes.com/sites/robertwood/2012/11/21/fatca-makes-foreign-banks-report-americans/ - that describe how foreign banks are now refusing to do business with Americans.


Here's a basic description of ongoing obligations from the IRS website:

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

 

[WaterDad]

The IRS site is confusing, but has a wealth of information (too much, which reflects the reality of the US tax code).

US tax software actually does pretty well with most of these issues (I use TurboTax) - until you need one of those forms I mentioned, then it directs you to the IRS site. If you have to submit a 3520 or 5471 you have to submit a paper return.

Here's a good post about FBARs and 3520s (or 8891 for Canadian RRSPs): http://www.irs.gov/uac/IRS-Announces-Efforts-to-Help-U.-S.-Citizens-Overseas-Including-Dual-Citizens-and-Those-with-Foreign-Retirement-Plans

They're definitely pushing to make people comply with all of this. There's also a new rule next year that foreign banks must report details of accounts by American account holders to the IRS. I've read articles - like this one http://www.forbes.com/sites/robertwood/2012/11/21/fatca-makes-foreign-banks-report-americans/ - that describe how foreign banks are now refusing to do business with Americans.


Here's a basic description of ongoing obligations from the IRS website:

Thanks for the links, Jimmy Dean!


It is so strange. I mean the state I was born in isn't still making me file taxes with them! LOL I'm going to play the game and also Turbo Tax it up and see how it goes.


Also, I don't even want to think about state taxes and all that. I have heard that to "sever" legally I would have to surrender my drivers license back to the state I left, amongst other things, to no longer be considered a "tax domicile". Ugh. No wonder expats renounce their citizenship!

 

[lunas]

Thank you for the information. I won't have to deal with this crap next year but I will for sure in 2014. I am already feeling dizzy and I agree with a post above, no wonder why some give up their American citizenship :-X

 

[computergeek]

Thank you for the information. I won't have to deal with this crap next year but I will for sure in 2014. I am already feeling dizzy and I agree with a post above, no wonder why some give up their American citizenship :-X

Giving up citizenship is difficult - there's a fee, an application and you must endure an interview explaining why you'd want to do something so crazy.

Here's a private site about renunciation (non-commercial): http://renunciationguide.com/

 

[lunas]

Giving up citizenship is difficult - there's a fee, an application and you must endure an interview explaining why you'd want to do something so crazy.

Here's a private site about renunciation (non-commercial): http://renunciationguide.com/

Sheesh! I guess I just need to get soaked with all this info.
Thank you so much for your help. I still have a long wait but these are things I don't want to miss for sure.

 

[WaterDad]

Giving up citizenship is difficult - there's a fee, an application and you must endure an interview explaining why you'd want to do something so crazy.

Here's a private site about renunciation (non-commercial): http://renunciationguide.com/

Thank you. The chart of taxes alone is amazing.

 

[mameelynn]

Giving up citizenship is difficult - there's a fee, an application and you must endure an interview explaining why you'd want to do something so crazy.

Here's a private site about renunciation (non-commercial): http://renunciationguide.com/

The funny thing to me is that they make people give up their green cards if they plan to live outside of the US for more then a year... you would think they would try to double tax them too... that is one of the main reasons I, the Canadian, will be becoming the main bread winner once we are up in Canada! I just feel bad for my kids because of crap like this!