US Taxes for American Expats in Toronto – What You Need to Know
With an estimated 80,000 Americans living there, Toronto is the third most popular US expat destination city in the world. US expats living in Toronto find themselves having to file both US taxes as a US citizen, and Canadian taxes as a Canadian resident though.
Living in Toronto is a great experience. The climate, the international culture, friendly Canadians, and the high-quality free schools and healthcare together more than make up for the hassle of having to file two tax returns.
And, in actual fact, the tax filing needn’t be as complicated as many American expats living in Toronto at first think it will be, as most end up not owing the IRS anything (even though they still have to file).
Canadian taxes in brief
If your only income is from employment in Canada, Canadian income tax will be deducted at source and you won’t have to file a Canadian tax return.
The Canadian tax year is the same as the US tax year, Jan 1st to December 31st. For those who do have to file them, Canadian income tax returns are due by April 30th, with no extensions available. Spouses must file Canadian taxes separately.
Canadian tax returns are filed to the Canadian equivalent of the IRS, the Canada Revenue Agency.
Canadian federal income tax rates range from 0% to 33%. There is also a provincial income tax that varies from province to province.
US taxes for expats
The first piece of good news is that expats have until June 15th to file their IRS tax return, with a further extension available on request until October 15th. Any tax owed is still due by April 15th though.
“A 2015 study by The Economist named Toronto as the world’s best city for expats to live in.”
– the Globe and Mail
Furthermore, while it’s always necessary to file, there are several exclusions that expats can claim that reduce almost every expat’s US taxes to zero.
If expats living and working in Toronto pay more in Canadian income tax than the US tax they owe, it’s normally more beneficial for them to claim the Foreign Tax Credit.
The Foreign Tax Credit offers US expats a $1 tax credit for every dollar equivalent of tax that they’ve paid abroad. For expats in Toronto paying more Canadian tax than they owe to the IRS, this means that they can claim more US tax credits than the US tax that they owe, eradicating their US tax liability while giving them excess tax credits that they can carry forward and which may come in handy in the future. Expats can claim the Foreign Tax Credit by filing form 1116.
For US expats earning under around $100,000 and paying less Canadian tax than the US tax due, the Foreign Earned Income Exclusion could be a better option.
The Foreign Earned Income Exclusion lets expats who can prove that they are either permanent residents in Canada, or that they spend at least 330 days outside the US in the year, exclude the first around $100,000 of their income from US taxes.
The Foreign Earned Income Exclusion can be claimed by filing form 2555.
Further US filing requirements for expats in Toronto
As well as filing a federal tax return, US expats in Toronto who have over $10,000 in total in foreign bank or investment accounts at any time during the tax year are required to file an FBAR (Foreign Bank Account Report). In practice this means filing FinCEN form 114 online before October 15th.
Because FBARs are filed to FinCEN rather than to the IRS, the penalties for not filing are much higher, so it’s important not to neglect FBAR filing, especially as almost all foreign banks and investment terms now provide the IRS with information about their US account holders directly.
Expats living in Toronto with non-tangible foreign assets (so not including property, or cars etc) worth over $200,000 at any time during the tax year also have to report them by filing form 8938 with their federal return.
Need to catch up with your US tax filing?
Expats who have been living in Toronto for a while but who didn’t know that they had to file US taxes can catch up with their US ta filing under an IRS amnesty program that means they won’t face any penalties.
The program is called the Streamlined Procedure, and to qualify you have to file your last 3 tax returns, your last 6 FBARS (if required), pay any back taxes that you owe (often none, once you’ve claimed the most beneficial exclusions given your circumstances), and self-certify that your previous failure to file was non-willful.
The Streamlined Procedure is a great opportunity for expats living in Toronto who are behind with their US tax filing to become compliant before the IRS comes to them.