Canada taxes only its residents on worldwide income. As such, after exiting Canada, Canadian citizens no longer pay taxes to the CRA on worldwide income.
Instead, as US tax residents, they must file US income tax returns, reporting their worldwide income to the IRS. However, such clients may still need to file Canadian income tax returns for Canadian-source income that they receive, paying any tax owing on that income to the CRA.
US residents will typically receive foreign tax credits for tax paid to Canada that can be used to offset tax owing to the US. If planned accordingly, foreign tax credits present exciting cross-border financial planning opportunities for our clients – opportunities that are ongoing and can be capitalized upon each year after implementing a cross-border financial plan.
Needing to file income tax returns in two countries necessitates organization and careful planning. Since US tax residents must report foreign bank accounts and financial assets that they retain offshore to the IRS, US tax filings can become complex, with several moving pieces.
Canadians who move south of the border and retain bank accounts and financial assets in Canada may have to meet FATCA filing requirements. Reportable financial assets under FATCA range from bank accounts to Canadian partnership interests and stocks and securities issued by non-US corporations. US residents with Canadian assets may also have to file FinCEN 114, the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR.
US income tax filers must not only manage many moving pieces, but there are also different methods of filing in the US than there are in Canada. In Canada, all taxpayers file individually. In the US, taxpayers can choose whether they would like to file as individuals, as married filing jointly, as married filing separately, or as the head of their household.
Each type of filing status has advantages and disadvantages that affect our clients in unique ways, depending on the timing of their exit from Canada. We therefore assist our clients with selecting a US taxpayer filing status, as well as with organizing their filing obligations and planning for maximal foreign tax credit use.