We estimate that over 1 million Canadians file tax returns in the U.S. and another 1 million should be filing, but don’t. Based on our experience, many of those that do file have a number of mistakes that could be very costly if the IRS were to discover those mistakes. Of those that don’t file, but should, we find the main reason is that they do not fully understand the U.S. residency requirements and therefore the requirement to file U.S. tax returns. In addition, there are many American citizens living in Canada that should be filing U.S. returns on their worldwide income. We will cover later this topic thoroughly, in our next book titled “Taxation of Americans in Canada.”
As Canadians, you can hardly be blamed for the fact that, as a group, your U.S. tax returns are most likely being done incorrectly. Taxation in general is complex enough, add to that rules that are seldom used by most tax preparers, then toss in the treaty that can modify the Canadian Income Tax Act and the U.S. Internal Revenue Code and you have a very complex set of rules. If that were not bad enough, in a number of cases, there are no clear rules or regulations addressing the issues you are facing, which makes it very difficult to file correctly even if you are trying to do the right thing.
The need for cross border tax specialist
From our vantage point, the need for cross border specialists is apparent, but we understand that you do not have our vantage point, so we will try to explain why it is so important to hire professionals that are experts in U.S.-Canada tax planning and preparation.
Here are some reasons that a professional that specializes in U.S.-Canada tax should be used:
- There is a lot at risk. There are risks that are unique to preparation of returns with international issues, such as forms that need to be filed and elections that need to be made. Failure to file a required form can be devastating, literally costing you tens of thousands or hundreds of thousands of dollars. And that may not be the worst of it; you could be deported or even imprisoned.
- There are a lot of complexities. Some of the complexities that arise on a regular basis are immigration, deemed disposition of property, residency issues, income, estate and gift taxes, how to title and own assets, the myriad of foreign reporting forms and the related issues and penalties involved, currency exchange, qualifying for social security benefits, special elections that need to be made, etc. We contend that it is impossible for someone that dabbles in this area to know all of the complexities involved. We have specialized in U.S.-Canada taxes for over 20 years and find it difficult to keep up with all of the changes going on in this area; there is no way that anyone dabbling in this area should be attempting to prepare these returns.
- The complexities need to be coordinated. Immigration should not be undertaken until the income and estate consequences have been considered and proper planning has been taken. You need to consider what actions need to be taken to show the authorities that you are a resident of one country or the other. You need to consider what actions need to be taken before you exit Canada and what actions should be taken after you are a resident of the U.S. Many of these actions need to be done in a particular order, so you have to know have to know what comes first, second, third, etc.
Here is an analogy for you to consider. If you were building a house, would you go out and hire an architect, a carpenter, a mason, electrician, painter, etc. and not coordinate them? What would happen if the framer did his or her work before the architect developed the plans; what would happen if the carpet was installed before the drywall was hung? We can all agree that the job would be a complete disaster, yet this is exactly what people typically do when looking to move across the border; very first thing they do is hire an immigration attorney to get them a visa. Guess what, you are now subject to a bunch of U.S. tax laws and you have done no planning; it is already a mess and you have barely gotten started.
- There is difference between knowledge and experience. It is one thing to know that A, B & C need to be done, it is another thing to know the specifics of how to get A, B & C done. The perfect analogy here is that of graduating university students. Even if they are in fields such as law, accounting, medicine, etc., we all know that they have no idea what they are doing when they get out of school, yet they have “learned” how to do their jobs in school. The knowledge that is needed is as deep as it is broad, and it takes experience to learn it. Keep in mind that 20 years as brain surgeon does not qualify you as a heart surgeon, and vice versa. Similarly, 20 years as an accountant does not qualify that accountant as a cross border tax specialist.
- Two experts on each side of the border do not equal a cross border specialist. On a regular basis we have clients that come to us that have hired the best advisor in Canada and the best advisor in the U.S. only to find out after spending hundreds of thousands of dollars that the professionals’ lack of understanding of the other country’s laws created a hurdle they could not overcome. Similarly, those specialists do not typically coordinate with other specialists.
The problem from your perspective (the taxpayer), is that you cannot tell the difference between a correctly filed and incorrectly filed tax return. Understandably, you do not know what forms need to be filed, what elections need to be made, or in some cases do not even what is taxable income and what is not. If you knew those things, you would prepare your own returns.
The solution is a cross border tax specialist; someone that does nothing but U.S.-Canada tax. That person should have access to cross border planning professionals that can look at all the aspects of a cross border lifestyle and coordinates those aspects together, just as a general contractor would coordinate all of the aspects of building a house.
We realize that some of you are skeptical and think that we are simply trying to scare you into hiring our firm to prepare your taxes. Well, you are partially correct; we are trying to scare you, but not necessarily into using our services. There are a handful of U.S. tax specialists that will do a fine job in preparing your returns. Though there may be more, we know of about a half-dozen firms in the U.S. that we would trust to prepare your returns properly.
When seeking a competent cross border tax specialist, we believe it is fair be curious about the cost of preparing a U.S. tax return with cross border issues. Of course we cannot speak for all of our peers, but based on our experience, you can expect to pay approximately $1,000 at the low end, up to $5,000 at the high end, depending on the complexity of your situation. These estimates do not include Canadian returns or business returns. For your first U.S. return, you can expect to pay about double, due to the calculations, elections, etc. that need to be made in the first year.
For more information on this topic, we recommend a book our professionals wrote, titled Taxation of Canadians in America: Are You at Risk? To order the book, go to www.taxationofcanadiansintheus.com
For other books written by KeatsConnelly professionals, go to www.crossborderseries.com
To speak with a tax professional contact us at email@example.com or call us toll-free at 800-394-9462.