Blog post

Question

Hi Mr. Hogan

I’m a Radiologist that moved to Victoria over 5 years ago with my family. Both my husband and 2 kids have US citizenship and my husband is also a Canadian Citizen. I currently have my permanent resident card and will apply for full Canadian citizenship when I am eligible. I got your contact information from XXXXXX who speaks very highly of you.

Although we’ve been good about keep up to date with our Canadian tax returns we have not filed US tax returns since moving to Canada. After talking to some of my colleagues at the hospital I feel as though I may be in trouble.

I also incorporated my practice a few years ago which likely further complicates the situation, especially considering the new tax changes the liberals are proposing.

I heard there are some amnesty options available for late tax filers. Does this apply to those working and living in Canada?

I also have a question about an IRA I have in the US. We don’t have any other assets in the US other than my $200,000 IRA. Should I leave it in the US or transfer it up to Canada, if this is even possible.

Sincerely

XXXXXX

Answer

Hi XXXXXX

Thanks for the email. I’ll do my best to outline your options, however to gain a much more detail understanding of the issues we should setup a time to meet or chat on the phone.

You are correct, as US citizens living in Canada you will be required to file both Canadian and US tax returns. If the kids are under 18 and not earning any income they will likely not have to file.

In additional to US income tax returns you would also be required to file FBAR forms (form 114 to report foreign financial accounts). Generally speaking all your Canadian bank and investment accounts will be listed on this form, including all your corporate accounts. This form does not attract tax, however the penalty for not filing is high.

You’ll also need to complete form 5471 to report the corporate activities on your US return. If you have started to earn passive investment income in your corporation we may need to tax income on your US returns that has yet to be withdrawn from the corporation.

Now, if you completed and filed all these returns and related forms with the IRS you would almost certainly be penalized with significant penalties. For example, the civil penalty for not reporting each foreign (foreign to the US) account is $10,000 and can be as high as the greater of $100,000 and 50% of your FBAR totals if considered a willful non-disclosure.

Luckily the IRS has mandated a special type of amnesty program that will allow you, assuming you meet certain conditions, to file your late US tax returns without threat of penalty. The program is called the streamlined tax filing program. Under the program you will be required to file the last 3 years of late US tax returns and all related forms. In addition, you’ll need to file the last 6 years of FBAR forms and a certification document that attests, under penalties of perjury that you were non-willful in your non-filing of US 1040 income tax returns and FBARs. You also need to qualify for the non-resident program (the streamlined program that does not have any penalties) by being out of the US for more than 30 days in any of the last 3 years.

If you can meet the criteria listed above you’ll likely be eligible for the streamlined tax filing program and you’ll be able to catch up on your tax returns without being penalized. Once caught up you’ll want to ensure you stay current in your filings.

To answer your question about the IRA. You definitely have some options for your IRA and generally speaking you can:

1. Leave the IRA in the US – I would normally recommend moving it up to Canada if you plan on being in Canada permanently. We have colleagues that can help you manage the IRA from Canada
2. Transfer the IRA to an RRSP – we do have the ability to transfer the IRA to an RRSP, however we would need to make the transfer over a number of years depending on your current income
3. Collapse the IRA and bring up the cash – this is almost never an option as you’ll end up paying way to much tax

I hope the information above has been helpful. Please give me a call at 250-381-2400 and we can setup a time to chat further about your situation.

Cheers

Phil