Canada / USA Tax

Hello,

I am contiplating appling for USA citizenship. Born and working in Canada. Never have drawn a wage or paid taxes in the USA but meet all the legal requirements.

What are the tax requirements in my situation? I do not plan to work for a USA company but would enjoy the dual citizenship. I have heard of a Canada / USA Tax Agreement where if you paid tax in Canada you only have to fill out the 1040 forms. Is this true?

Thanks

Hello,

I am contiplating appling for USA citizenship. Born and working in Canada. Never have drawn a wage or paid taxes in the USA but meet all the legal requirements.

What are the tax requirements in my situation? I do not plan to work for a USA company but would enjoy the dual citizenship. I have heard of a Canada / USA Tax Agreement where if you paid tax in Canada you only have to fill out the 1040 forms. Is this true?

Thanks

I'm not clear what you mean by "meet all the legal requirements". If you were born in Canada and have never lived in the US, the only way you'd "meet all the legal requirements" would be if you were already a US citizen by virtue of having had a US citizen parent. In that case you are already a US citizen--whether you have claimed the status or not--and theoretically should be filing US taxes already--and I know they are getting tougher about enforcing the tax code on dual citizens who may not be too familiar with their US status. As you say in a lot of cases you can reduce the actual US tax owed to zero via the tax treaty but you have to file 1040.

But unless you are already a US citizen via a US citizen parent, it is a very long road to get from where you are now to US citizenship--it isn't just a matter of saying you qualify and moving here. It is a very long road to even get a green card and US citizenship is usually at least five years further down the road than that. We'd probably need to know more about how you plan to emigrate/move to the US legally to offer any insight about the immediate tax implications.

What are the tax requirements in my situation? I do not plan to work for a USA company but would enjoy the dual citizenship. I have heard of a Canada / USA Tax Agreement where if you paid tax in Canada you only have to fill out the 1040 forms. Is this true?

As soon as you become an LPR of the US or a US citizen and you have reportable income you have to file a 1040 regardless of where you live. If you don't live in the US then you have to file Form 2555 or 2555-EZ to avoid dual taxation.

It's important to understand where your tax home is in this situation, and it's explained in the instructions for Form 2555.

If you are a US citizen who resides in Canada, then your tax home is Canada, even if you visit the US. The fact you are physically present in the US doesn't mean your tax home moves to the US unless you establish residential ties to the US, so basically you can claim the full foreign exclusion limit for the whole year even if you visit the US.

Bear in mind the foreign exclusion limit is $87,600, so if you add on the various things like your allowed deductions and so on then even if you live in Canada full-time, if you earn around roughly US$100,000 or more you will be paying some US income tax as a US citizen.

Bear in mind the foreign exclusion limit is $87,600, so if you add on the various things like your allowed deductions and so on then even if you live in Canada full-time, if you earn around roughly US$100,000 or more you will be paying some US income tax as a US citizen.

Wouldn't such a person--if their tax home is established in Canada--file the US return first and then claim the tax from the US return as a credit on the Canadian return? The total tax paid--especially given the higher Canadian tax rates and the fact that no US state tax, only US federal tax, is due--would end up being the same.

It's not eligible for a foreign tax credit because it's not foreign-sourced income, it's been earned in Canada or wherever, not the US. It's a US tax on income you earn in the country where you reside. Under the laws of that country you have to pay x amount and what US law has to say about it is irrelevant in that country, so you're exposed to dual taxation at that point. Canada or any other country for that matter isn't going to allow the US to effectively steal their payroll taxes, so you have to pay twice.

The way around it for the super wealthy is to keep your spouse living in the US for 184 days a year and other residential ties, your tax home then remains the US for the purposes of most (but not all) other countries and you can claim a foreign tax credit in the US for the tax you're paying in country x (if there is any). But even then at a bare minimum you're paying US federal income taxes on your income. Even if you renounce US citizenship, you're subject to expatriation tax for ten years.

Note the foreign exclusion limit was introduced in 2006 and was thought up by a Republican senator - the Democrats promised to repeal it but strangely they seem to have lost interest, hmm, I wonder why?