Complexities and nuances to cross border taxes
Cross border taxes have a number of unique and complex components. Below are some key considerations that should specifically be incorporated when preparing cross border taxes for individuals.
A. Currency conversion
Tax returns need to be reported in the local currency where you submit the return. The process to convert foreign transactions involves identifying the appropriate reporting period, and the related exchange rates. The reporting period could be a specific date in which case the spot exchange rate on that date would be appropriate. Other reporting periods include historical periods, or annual periods of time, where the historical exchange rates or the average exchange rate may be appropriate. Additionally the tax authorities may specify the exchange rates they want you to use on specific forms.
Neither the Canada Revenue Agency or the Internal Revenue Service have their own internal official exchange rates. On the US side, the IRS has some key average exchange rates posted on their website. The IRS is also a division of the Department of the US Treasury who have a currency conversion website available. On the Canadian side, the CRA recommends using the Bank of Canada for currency exchange rates. Both the US and Canadian tax authorities will accept exchange rates from other sources. Acceptable other sources include published, recognized independent providers, who provide exchange rates on an ongoing and consistent basis.
B. Foreign asset reporting
Both the US and Canada have foreign asset filing requirements for their residents and citizens who have foreign asset holdings. These forms have minimum filing thresholds, but once those thresholds are met, there are significant penalties for failure to file these on a timely basis. On the US side these include the Foreign Bank and Financial Account Reporting (FBAR / FINCEN 114) and Form 8938 (Statement of Specified Foreign Financial Assets). On the Canadian side this reporting includes the T1135 (Foreign Income Verification Statement).
C. Foreign tax credits
Foreign tax credits are a key method to eliminate double tax. The creditable tax amounts on the US side are calculated and reported on IRS Form 1116. On the Canadian side, the creditable foreign tax credits are calculated and reported on CRA form T2209. These calculations can be complex and this is an area that gets extensively reviewed by the CRA. The US- Canada Tax Treaty is one of the key sources of information to correctly understand and apply cross border foreign tax credits.
D. Understanding financial account types
The US and Canada have differences when in comes to the labeling, functioning and taxation of various financial accounts. These includes financial accounts in the retirement, savings and brokerage account categories. For example a TFSA is a registered account type in Canada but this is not a recognized account type in the US. This difference triggers additional reporting and tax implications for those with cross border tax filings.
Additional examples on the Canadian side are registered accounts like the RESP, RRSP and LIRA accounts that are uniquely Canadian. Comparatively, on the US side, account types like the 401K, IRA, and Section 529 College Plans are uniquely American. Cross border accountants should have a comprehensive understanding of all of these account types, and the US-Canada Tax Treaty, for the purpose of ensuring accurate tax preparation.
Cross Border Taxes
To learn more about the skillset required for cross border tax accountants click here. To learn more about our typical cross border tax clients click here.
Our Team
Richard Markman, the owner and key operations person at US Taxes Toronto, lived in the United States for nearly 20 years. He is a US Certified Public Accountant in the State of California. He also holds an active CPA license in the Province of Ontario, Canada. Our business focus is on cross border taxes and we also have a comprehensive understanding of how and when to apply the US-Canada Tax Treaty. Gives us a call to learn more about our services.
How Can US Taxes Toronto Help?
We can assist with the preparation of your US and Canadian Tax Filings. Our Cross Border Tax Accountants provides hands on ongoing support throughout this process, so that preparing and completing your tax filing is convenient and easy. If you would like to get more information on how we can help please reach out to us via our contact page.