Fifty years ago a Californian friend of mine got in an argument with her parents and stormed out on her own. I sketch her story here with enough changes to keep her anonymous.
Adventurous, eighteen, and tired of attention from beach bums, she took her bronze skin and blonde curls, and went on an adventure that landed her in, of all places, Stewart, B.C. There she worked in a bar and enjoyed the contrast it gave her to the hot and dry home she grew up in. Eventually she met a guy, married, raised a family in the region. She lost her husband to cancer about 5 years ago and inherited his investment portfolio and RSP’s. She now sits on about $750,000, which is about right to last her for her expected life, and leave a bit for her kids. Except she has a problem. The IRS.
Living next to the U.S., is like laying on the beach next to a big blue whale. He’s a friendly beast, but his shadow is long and wide, and if he decides to roll over, it’s gonna hurt. The whale has a pet alien spider named IRS with freakishly-long tentacles and a voracious appetite. The tax law fuelling IRS’s mothership can take her to any corner of the universe. There’s just no hiding.
In fact, many living in Canada would be surprised to learn how true this is. Consider these examples of people caught in the sticky icky web that is the U.S. tax system, and might not even know it.
- Suzy, a U.S. citizen now living in Head-Smashed-in Buffalo Jump, Alberta;
- Polly, a retired Canadian living in Spuzzum, B.C. also owns a cottage in Burnt Porcupine, Maine.
- And then there’s Bill, born prematurely while his Canadian parents were visiting Blaine Washington. They were buying cheese, when along came Bill before their Tim Horton’s coffee even got cold. Bill has lived in Canada since the day after his birth, and is now a father himself;
- Terrance, Bill’s son, is a Canadian citizen living in Eyebrow Saskatchewan, where he works at a maple syrup farm.
- Julie, a U.S. green card holder born in England, but now living in Medicine Hat where she works as a Zamboni driver;
- Solomon, a Canadian citizen living in Stoner, BC, just got back from his first warm and wonderful snowbird vacation in Yuma, where he spent 183 days and won the world Canasta title;
- Rosemary, a red-blooded Canadian has a tattoo of Ken Dryden on her hip, and is a retired snake trainer living in Yellowknife. She spends about 4 ½ months every year in the states visiting her only son, Lu, who happens to be CEO of the IRS;
- Mohammed is a Canadian citizen who lives in Punkeydoodles Falls, Ontario and owns 1000 Apple shares;
Each of these people have U.S. tax exposure, resulting from some sort of connection to the U.S. In most cases, they would have U.S. tax filing obligations. Failure to file could result in significant penalties, and possibly a visit from Rosemary and her son — whose full name isn’t Lu.
U.S. tax exposure can accrue to:
1) All U.S. citizens are considered taxable wherever they happen to reside;
2) Anyone from anywhere in the world who obtains U.S. green cards or spend significant amounts of time in the U.S.;
3) Persons who receive certain types of income from US sources and holders of certain kinds of property situated in the U.S. whatever their citizenship. More on this later.
4) The U.S. tax system may even extend to persons who are neither U.S. citizens nor even live in the U.S. but are considered to be domiciled in the U.S. Domicile in essence refers to persons who think of the U.S. as their permanent home regardless of where they reside. Say what?
Curiously, and unlike Canada, the U.S. has two tax regimes:
- The US Income Tax System applies to income received annually;
- The U.S. Transfer Tax system, applies to gifts of property.
Persons that reside in the U.S. permanently, or for extensive periods in a year or series of years, and in some cases, who are frequently present in the U.S. are caught by the former. U.S. citizens, whether they live in the U.S. or not, are subject to both. Green card holders are subject to the U.S. income tax system and likely also transfer tax. Persons domiciled in the U.S., even if they spend little or no time in the U.S., are still potentially subject to the U.S. transfer tax system.
Therefore it is entirely possible that Canadian citizens, U.S. citizens and green card holders residing in Canada, and persons that are not Canadian or U.S. citizens but are simply residing in Canada can have U.S. tax obligations. Filing obligations in the U.S. include both annual tax returns, and information returns as well. The penalties for non-filing can be exorbitant.
Starting in January, I will elaborate further, showing situations where you or someone you know could be impacted. In these circumstances, it is very important to obtain tax advice from a U.S. tax expert. Such cross-border experts are few and far between in Western Canada.