The Double Jeopardy of a U.S. Citizen

National Post


If you’re a U.S. citizen living in Canada, then time is running out for you to file your 2011 U.S. 1040 tax return, if you haven’t already done so.

Unlike most countries in the world, the U.S. requires its citizens to file a U.S. tax return reporting worldwide income no matter where that U.S. citizen resides. This is in contrast to nearly every other country’s tax system, including Canada’s, which taxes based on residency.

In other words, if you’re a Canadian citizen living in the U.S., you generally don’t have to file a Canadian return. But a U.S. citizen living in Canada must file both a Canadian tax return reporting worldwide income based on his or her residency in Canada and a U.S. return reporting worldwide income based on his or her U.S. citizenship. The good news is that in most cases, there will be no U.S. taxes owing since there would be sufficient foreign tax credits available from taxes paid in Canada to offset any U.S. tax owing. Notwithstanding no amount payable, there still is an obligation to file that U.S. return.

The normal U.S. filing deadline, which was April 17 this year, is automatically extended by two months for U.S. taxpayers living abroad to June 15, provided you attach a statement to your U.S. return indicating that you reside outside the U.S.

Don’t have time to get all that paperwork in by Friday? You can request an additional extension until Oct. 15. However, if you do owe U.S. tax, any amount paid after June 15 would be subject to both interest and failure to pay penalties.

While it’s estimated there are up to one million U.S. citizens in Canada, many of them continue to remain undercover as far as fessing up to the IRS and continue to ignore their U.S. filing obligations. This despite a more relaxed IRS position announced last December that could see some of the harsher penalties for failure to file certain forms waived if you can demonstrate “reasonable cause.”

If you do happen to owe U.S. taxes, your ability to travel to the U.S. in the future could be severely restricted if a bill, which is now being studied by a congressional conference committee, sees the light of day.

Under U.S. law, it is illegal for a U.S. citizen “to depart from or enter the United States unless he bears a valid United States passport.” A recent tax amendment added to the senate version of the Highway Trust Fund bill, would authorize the U.S. government to revoke or deny the renewal of a U.S. passport to an individual who owes more than US$50,000 in U.S. taxes, effective Jan. 1, 2013.

A 2011 U.S. government accountability office report found that in fiscal 2008, U.S. passports were issued to 224,000 individuals who collectively owed US$5.8-billion in unpaid taxes. As the senate committee concluded in its report, “Tax compliance will increase if issuance of a passport is linked to payment of one’s tax debts.”