23 Jun Are you a US Citizen living in Canada? Are you up to date with your US tax returns? If not, NOW might be the perfect time to get caught up.

Unlike every other country in the world, the United States taxes its citizens regardless of where they live.  Thus, if you are a US Citizen (naturalized or born there and have not officially given it up), you are technically required to file US tax returns (called Form 1040) annually.  Due to foreign tax credits and a tax treaty between the two countries, in most circumstances you will not actually owe any US tax if your income is all from Canadian sources.  The requirement to file is still there however and there are penalties for not filing certain forms that are included with the tax preparation.

For example, if you have more than $10,000 USD in aggregate in all your foreign financial accounts (Canadian bank accounts, RRSPs, investment accounts etc.), then you are required to file a return called an FBAR annually and there are penalties of $10,000+ for not filing.

The Streamline Foreign Offshore Procedure

The US Government recognizes that there are Americans living abroad that are unknowingly delinquent on their tax filing requirements.  They have a program called the Streamlined Foreign Offshore Procedure that allows taxpayers to get ‘caught up’ on their US taxes without penalties.  You can file three years of past tax returns, six years of past FBAR returns and complete a certification statement that confirms your failure to file was due to non-willful conduct.  To be eligible for this program you need to have not spent more than 35 days in the US in at least one of the last three years. Learn more about this procedure here.

Economic Impact Payments

It is not new that US citizens need to file tax returns and this procedure has been around since 2012.  However, there is a something new that adds an urgency to filing this streamlined procedure now.  In 2020, the US Government gave out Economic Impact payments (often referred to as stimulus payments) to all Americans to help with the Covid burden.  The stimulus payments were based on income level but not on where the individual resided.  Thus, many Americans living in Canada, who had been filing US tax returns regularly, received these stimulus payments.

Do you qualify for the Recovery Rebate Refund?

The stimulus payments were dependent on income levels and could be more with eligible dependents but for those that qualified, most received $1,800 USD in 2020 and another $1,400 in 2021.  If a taxpayer had been filing tax returns regularly, these payments came automatically and were not considered taxable income.  If a taxpayer didn’t get the payment for whatever reason, they could include a recovery rebate on their tax return, and they would receive the stimulus payment as a tax refund. To qualify for the recovery rebate, the taxpayer’s US SSN must have been issued before 2021.

The stimulus payments or recovery rebates were reduced when worldwide income went above $75,000 USD.  However, if your income includes employment income or self-employment income, you can use the foreign earned income exclusion and deduct up to $100K of earned income from your adjusted gross income.  Thus, many taxpayers that live in Canada could earn up to $175,000 USD and still qualify for this recovery rebate.

Why now is the best time to catch up!

Therefore, if you file late tax returns now for 2020 and 2021, you can include these recovery rebates and potentially get refunds up to $3,200 USD.  The catch is that the IRS does not like to give out refunds for returns that are over three years past due.  Hence, why NOW(ish) is potentially the time to get caught up on your US tax returns.

The 2020 Form 1040 was due April 2021, so by April 2024 this return will be over three years late and the potential $1,800 recovery rebate will be lost.

Thus, I would suggest filing a streamlined procedure before the end of February 2024 to ensure you will benefit from the tax refunds.  If you choose to use an accountant to help prepare the returns, the refunds will help to pay their fee. At our office, streamlined procedure engagements start at $3,500 CAD.

You may not want to file because you would prefer to give up your US citizenship instead.  The pros and cons of that decision are a whole other discussion, but you should know that you need to be five years tax compliant to renounce your citizenship and eliminate your tax filing requirement.

In summary, getting caught up in you US tax filing in the next 8 months or so could make you $1,800 USD better off than if you wait until after.

Feel free to reach out to our office at [email protected] if you would like to learn more.