The Tax Cuts and Jobs Act (TCJA) passed in the U.S. in late 2017 contains significant changes to individual tax provisions that affect U.S. citizens and residents. The U.S. system of taxation differs from that of Canada and most other countries in that it establishes a liability to pay tax on the basis of citizenship, as well as based on tax residence. As a U.S. citizen, you continue to have annual U.S. income tax filing obligations, even though you may be resident in Canada. Note that similar filing obligations also apply to U.S. green-card holders, who are generally treated as U.S. residents for U.S. income tax purposes. As a U.S. citizen or green-card holder (henceforth, a U.S. person), you must file annual U.S. income tax returns reporting your worldwide income regardless of where you live or how long you have been away from the U.S.
There has been a campaign in recent years by the U.S. government to make sure that U.S. persons living outside of the U.S. are aware not only of their income tax filing obligations for income tax returns, but also for related information filings, which often have steep penalties for failure to comply.
The TCJA introduced numerous changes affecting the calculation of U.S. personal tax. In addition to changes to tax rates and brackets, many rules affecting the determination of reportable income, and allowable deductions and credits have been modified. Virtually all of these provisions became effective for the 2018 taxation year.
The TCJA particularly impacts U.S. persons living in Canada who are shareholders of controlled foreign corporations (CFCs). Generally speaking, a CFC is a non-U.S. corporation in which more than 50% of the votes or value of all stock is directly, indirectly, or constructively owned by U.S. persons. The rules regarding U.S. persons investing in CFCs are very complex.
In 2017, the TCJA imposed a one-time tax known as the "transition tax" on U.S. persons who own 10% or more of the shares of a CFC. The transition tax is imposed on the accumulated, untaxed foreign earnings and profits of the CFC, which is conceptually the U.S. tax equivalent of the CFC's retained earnings that have not already been subject to U.S. personal tax.
For 2018 and subsequent years, transition tax has given way to a new tax on global, intangible, low-taxed income (GILTI). Conceptually, GILTI is the after-tax net business profits of the CFC in excess of a 10% return on the depreciated cost basis of tangible capital assets used in that business. Accordingly, GILTI tends to impact service businesses more than capital-intensive businesses. Certain planning measures are available to help avoid or mitigate tax on GILTI.
Normally, you must file your U.S. return for a particular year no later than April 15 of the year following the year in question. However, there is an automatic filing extension to June 15 if you reside outside the U.S. on April 15. For example, if you are a U.S. citizen, and you are a resident of Canada on the April 15 deadline (April 15, 2019, for the 2018 tax year), you have until June 17, 2019, to file your 2018 U.S. tax return. However, interest accrues on any tax balance owing from April 15, 2019, onwards, and late-payment penalties may also apply.
If you have additional questions about taxes for U.S. citizens living in Canada, please contact a BDO tax advisor from our U.S. personal tax practice.
Additional Insights
Tax Alert: New U.S. tax on U.S. citizens owning Canadian private companies
Tax Bulletin: Tax consequences for U.S. citizens and other U.S. persons living in Canada
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of March 9, 2019.