Tax Matters

Jamie Golombek

As managing director of tax and estate planning with Canadian Imperial Bank of Commerce's wealth advisory services division in Toronto, Jamie Golombek is quoted frequently in the national media as an expert on taxation.

The situation facing these clients is more complex as they have certain filing requirements in the U.S. in addition to their U.S. and Canadian tax returns

By Jamie Golombek |

Although tax season may still be a couple of months away, now is a great time to start helping your U.S. citizen clients get ready for their U.S. tax filings.

As you are undoubtedly aware, U.S. citizens living in Canada must file not only Canadian tax returns but also U.S. returns, as the U.S. is one of the few countries in the world that taxes based on citizenship as opposed to residency.

U.S. tax compliance, however, goes well beyond simply filing a 1040 U.S. federal income tax return. Here are some of the other filing requirements of a typical U.S. taxpayer living in Canada and the information they may need from you this coming tax season:

FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR)
All foreign financial accounts — including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account — with more than $10,000 in assets must be disclosed annually to the U.S. Department of Treasury by filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically.

Clients will generally need: the bank or financial services institution's name and address, the account number, the account owner(s) and the maximum balance during the year.

Form 8938, Statement of Specified Foreign Financial Assets
If the client's account value — and other specified foreign financial assets — exceeded $200,000 on Dec. 31, 2014 or $300,000 at any time during 2014, those assets must, with some exceptions, also be reported on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the 1040 income tax return.

Forms 3520 and 3520A
If your U.S. citizen client holds a tax-free savings account (TFSA), registered education savings plan (RESP) or a registered disability savings plan (RDSP), these accounts do not have a tax-preferred status in the U.S. As a result, the income from these accounts must be reported annually on a U.S. tax return. Most U.S. tax professionals consider these Canadian plans to be foreign grantor trusts, from a U.S. tax perspective, and thus also subject them to onerous and costly filings (Form 3520, Annual Return To Report Transactions With Foreign Trusts and Form 3520A, Annual Information Return of Foreign Trust With a U.S. Owner.)

U.S. citizen clients with an RESP, TFSA or RDSP will generally need: the amounts and types of income earned in 2014 within these plans, the date each plan was established, their total contributions to date plus the contributions made during 2014, including grants and/or bonds for RESPs/RDSPs, along with a copy of their year-end statements.

Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company
Finally, U.S. citizens are generally cautioned to avoid purchasing Canadian mutual funds as they are considered to be Passive Foreign Investment Corporations (PFICs) under U.S. tax law and must be disclosed extensively on Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company.

U.S. citizen clients who own mutual funds will generally need to provide: the name of each fund held, any T3 or T5 slip showing income distributed to them during the year, along with the amounts for each of the prior three years as well as the fair market values of the investment at the beginning and end of 2014.

Note that some fund companies have started to provide PFIC Annual Information Statements for their funds that allow investors to make a Qualified Electing Fund (QEF) election on their U.S. tax returns. The QEF election allows for long-term capital gains to be taxed at more favourable rates and interest penalties can be avoided.