US citizens and permanent residents residing in Canada have several US tax obligations to meet annually, including preparing a US tax return and forms specific to their situation. Since the tax treatment is sometimes different from Canada, there may be an amount of tax payable to the US tax authorities. Good tax planning is therefore essential to avoid unpleasant surprises!
Registered plans
For Canadian purposes, income generated annually within the Tax-Free Savings Account (TFSA) and Registered Education Savings Plan (RESP) is not subject to tax. However, for US purposes, income must be added annually to your tax return since the US tax authorities do not recognize the reciprocity of these regimes. In addition, additional tax compliance is also required for holders of a TFSA, which is no longer the case for RESPs.
Disposal of a main residence
According to the Income Tax Act (the Canadian tax law), when you have a principal residence, the amount of the capital gain that would have to be included in your Canadian income tax return could be exempted in full if you use the principal residence exemption, to the extent that you have normally lived in this residence during all the years designated.
In the United States, the eligibility criteria differ and the exemption amount is limited and varies depending on your production status. It is therefore possible that the capital gain otherwise exempt in Canada may only be partially exempt in the United States. As this has been fully exempt in Canada, no foreign tax credit will normally be available to reduce the tax payable in the United States.
Tax planning
When you make an RRSP contribution, it can be deducted on your Canadian income tax return and thus reduce your income subject to tax. However, a corresponding deduction cannot be used on your US tax return since the RRSP deduction is not allowable in the United States. Therefore, if you take too large a deduction, your tax rate in Canada could be lower than that in the United States, creating a tax balance payable.
To find out more, do not hesitate to make an appointment with our tax experts specializing in US tax. We have the expertise to answer your questions and make sure your planning is optimized so that you pay no taxes in the United States.