Canada-US relations: 2 costly tax implications you might not know!

Do you spend a lot of time in the United States? Do you hold U.S. citizenship? Are you connected to an American citizen living in Canada? If so, this information is vital for you!

Canada and the U.S have a unique relationship because of our long shared border. As a result, it is not unusual for Canadian and U.S citizens to cross into each other’s country and do business; however, there may be tax and financial privacy implications that you may not have considered! Here are some key things to know about cross-border taxation: 

1) Staying in the U.S. too long could mean a tax bill from the IRS.

In 2015, Canada and the U.S. began sharing information on who leaves and enters each country. This allowed for progress in tracking down any security threats—but it also means that each country knows exactly how many days an individual spends in either country.

For the purpose of paying taxes you will be considered a United States resident if you meet the Substantial Presence Test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:

  • 31 days during the current year, and
  • 183 days during the three-year period that includes the current year and the two years immediately before that, counting: 
    • All the days you were present in the current year, and
    • 1/3 of the days you were present in the first year before the current year, and
    • 1/6 of the days you were present in the second year before the current year.

Example: You were physically present in the U.S. on 120 days in each of the years 2012, 2013, and 2014. To determine if you meet the substantial presence test for 2014, count the full 120 days of presence in 2014, 40 days in 2013 (1/3 of 120), and 20 days in 2012 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2014.

There are other rules and exemptions specified to determine if a person may be liable for taxes. Being aware of the test and limiting the number of days in the U.S. to those allowed under the test, you will likely see little or no change in your U.S. tax obligations.

U.S law gives the IRS access to Canadian banking information

The U.S. Foreign Account Tax Compliance Act (FATCA) requires that foreign financial Institutions and certain other non-financial foreign entities report on foreign assets held by their U.S. account holders. This law could affect you if you have money or assets held in a Canadian bank and are: 

  • A U.S. citizen living in Canada,
  • A Canadian/U.S. dual-citizen living in Canada, or
  • A Canadian citizen connected through family or business to a U.S. citizen living in Canada.

Canadian banks protect personal information in Canada under The Personal Information Protection and Electronic Documents Act ; however FATCA requires Canadian banks to share with the IRS information found in Canadian bank accounts linked to U.S. citizenship. As a consequence, if a Canadian citizen’s information was to be found in the linked accounts, their information would also be turned over.  

The intention of FATCA was to bring U.S. citizens living abroad into tax compliance but it had unintended consequences. Along with a loss of privacy for citizens outside of the United States, there could also be filing obligations to manage, red tape to overcome and extra accounting costs incurred.

You can ask the Privacy Commissioner for guidance
Tax laws are complex; adding another country’s requirements to the mix may require you to seek out further help. If you believe either of these scenarios may affect you, you can contact the office of the Privacy Commissioner of Canada. Alternately, your accountant may be an invaluable resource to helping you understand FATCA, Substantial Presence or any other IRS-mandated filing implications.