Tax Issues of Americans with Dual Citizenship

Last updated on February 3, 2023

Foreign citizens with dual U.S. citizenship have to deal with complex tax problems every tax season. Most of the time, taxes are based on where a person is living and where they work. Millions of Canadians have dual U.S. citizenship and millions of Americans live overseas. If you are an American citizen living overseas, you need to file taxes in the U.S. This makes taxation complicated to American expatriates.

The Globe and Mail shares how tough it is for Americans living abroad to fulfill their U.S. tax obligations: ‘“It’s a disaster, a horrible disaster, because of all the reporting requirements and the cost of compliance,’ says Michael Bondy, partner in London, Ont., at Collins Barrow KMD LLP, a nationwide chartered accounting group.

“It’s about to get worse, he adds.

“U.S. citizens have always been expected to self-report to the IRS, and, until recently, the tax implications have more or less been neutral for dual citizens with low and moderate incomes.

“Under Canada-U.S. tax treaties, a U.S. filer living in Canada can deduct the amount of tax paid in Canada from his or her U.S. bill. Generally, Canadian income tax is higher than U.S. tax.

“‘If everything worked the way it’s supposed to work, you would pay Canadian taxes but you’d pay little or no U.S. tax,’ Ms. Nijhawan, a tax partner at Bennett Jones LLP, says. This is generally true for individuals with up to about $200,000 a year in income.

“The money you put away in an RRSP, and your RRSP’s gains, are generally not subject to extra U.S. tax while you’re contributing and the money stays in the plan, because the Canada-U.S. treaty recognizes these retirement savings.”

After Foreign Account Tax Compliance Act (FATCA) was passed in 2010, many U.S. citizens who were living abroad gave up their U.S. citizenship because of the strict tax compliance rules. Until now, U.S. citizens living overseas could avoid paying taxes in the U.S., but after FATCA, the IRS is bound to penalize those who do not comply.

The Globe and Mail speaks about the tax duties of U.S. citizens living in Canada: “U.S. citizens in Canada are supposed to fill out a U.S. form electing to defer any possible taxes until after the RRSP is converted into a Registered Retirement Income Fund at age 71.

“RESPs and TFSAs are in the IRS’s sights, though. The tax treaty doesn’t recognize these plans, so the grant money that the Canadian government contributes to the education plans and the income you earn on both TFSAs and RESPs are subject to U.S. tax if you hold U.S. citizenship.

“In addition to filing a tax return, U.S. citizens in Canada are required to file a foreign bank account report (FBAR) before June 30 of every year. They’re supposed to report any ‘foreign’ account that had more than $10,000 – remember, to the United States, your Canadian savings account is in ‘foreign’ currency.

“Until recently, many dual citizens simply ignored the U.S. tax rules; in many cases they weren’t aware of them, or didn’t even know that they were U.S. citizens as well as Canadians.”

The tax season has started and U.S. citizens living overseas will need to brave the many tax complications and file their taxes in the U.S. along with the country in which they live.