US citizens who live in Canada – whether in the short term or over decades – still enjoy the privileges and rights of citizenship. However, they also have some of the obligations of US citizenship, such as paying US taxes and filing US tax returns. Unlike other developed countries, the US taxes based on citizenship rather than residency. This means that US citizens who live in Canada, even for a very long time, must still file US tax returns regularly.
The good news is that in many cases US citizens may not need to pay US taxes in addition to any Canadian taxes they need to pay by working and living in Canada. The IRS provides a credit for taxes paid in Canada. In most cases, this credit covers the taxes owing in the US. However, US citizens in Canada may still need to pay the fees associated with tax preparation and filing. And even if a US citizen in Canada knows that they do not owe US taxes, they are still responsible for filing a tax return.
Filing a US tax return is simple and can usually be done at the same time as filing a Canadian tax return – even much of the information requested on both forms is similar. The US tax return must be filed with the Internal Revenue Service (IRS) and must include a request for a refund or a check to cover any outstanding tax amount or any fees. Recently, refunds for US citizens are more typical, since the US has been launching many initiatives for taxpayers in order to stimulate the economy.
In addition to filing a tax return, US citizens living in Canada must also typically file the U.S. Department of the Treasury TD F 90-22.1 (Report on Foreign Bank and Financial Accounts). Popularly known as FBAR, this form shows all the bank accounts, bank account balances, and investment accounts US citizens may have in Canada over a calendar year. Failure to file the form can result in jail time as well as fines of up to $100 000. This rule is meant to prevent US citizens from hiding money in offshore accounts, but US citizens living in Canada still need to abide by this rule in order to avoid penalties.
Beginning in January 2012, there will be some changes for US citizens living in Canada. Starting on that date, banks and financial institutions in Canada will ask whether you are a green card holder or US citizen. The bank will need to file reports with the IRS if you are a US person. This is part of FATCA (the Foreign Account Tax Compliance Act) and is meant to ensure that US citizens are reporting their income abroad. If you do not cooperate with the bank when asked, you may have 30% in taxes automatically withheld from any income coming from the US.