Taxation of Canadians in America. David Levine

      We estimate that more than 1 million Canadians file tax returns in the US 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 Internal Revenue Service (IRS) were to discover those mistakes. Of those who don’t file, but should, we find the main reason is that they do not fully understand the US residency requirements and therefore the requirement to file US tax returns.

      As Canadians, you can hardly be blamed for the fact that, as a group, your US 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 US 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.

      This book will attempt to address most of the US tax- and estate-planning issues you will face as a Canadian living in the US. We will be primarily addressing individual taxation because it is the area most people need help. Besides, to discuss the cross-border implications of corporations, partnerships, trusts, etc., would require at least one whole book dedicated to nothing but the tax issues cross-border businesses face. While we will discuss these various entities from time-to-time, we will only cover the issues from the perspective of how they affect you as the individual.

      KeatsConnelly is the largest and most experienced cross-border wealth management firm in North America that specializes in helping Canadians and Americans realize their dreams of a cross-border lifestyle. KeatsConnelly was started in 1990 and has more than 35 employees, with offices in Phoenix, Arizona; Boynton Beach, Florida; and Calgary, Alberta.

      Cross Border Tax & Accounting is a wholly owned subsidiary of KeatsConnelly that specializes in tax planning and preparation for Canadian and US citizens, who live, work, or conduct business across the US-Canada border. A team of Canadian Chartered Accountants and US Certified Public Accountants prepare all types of US and Canadian tax returns. It is the cumulative expertise and experience of the professionals at KeatsConnelly and Cross Border Tax & Accounting that we draw upon in writing this book.

      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 US-Canada tax planning and preparation.

      Here are some reasons that a professional who specializes in US-Canada tax should be used:

      • Prevent 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. That may not be the worst of it; you could be deported or even imprisoned.

      • It is complex: 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 who dabbles in this area to know all of the complexities involved. We have specialized in US-Canada taxes for more than 20 years and find it difficult at times to keep up with all of the changes going on in this area; there is no way that anyone who is new to this subject should be attempting to prepare these returns.

      • 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 US. Many of these actions need to be done in a particular order, so you 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, and painter 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 US tax laws and you have done no planning; it is already a mess and you have barely gotten started.

      • The difference between knowledge and experience: It is one thing to know that A, B, and C need to be done, it is another thing to know the specifics of how to get A, B, and C done. The perfect analogy here is that of graduating university students. Even if they are in fields such as law, accounting, and medicine, 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 a 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 who have hired the best advisor in Canada and the best advisor in the US 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 know 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 who focuses on US-Canada tax. That person should have access to cross-border planning professionals who 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 US tax specialists who will do a fine job in preparing your returns. Though there may be more, we know of about a half-dozen firms in the US that we would trust to prepare your returns properly.

      When seeking a competent cross-border tax specialist,