From Americans Living in Canada – Smile, The IRS is Watching You, by David A. Altro and Jonah Z. Spiegelman. Copyright © Altro Levy LLP, 2014. Reprinted with permission of Altro Levy LLP
The US is the only western country in the world that imposes tax on its citizens regardless of where they live and no matter where income is earned. Most countries require only residents to pay tax. If you exit Canada, for example, you don’t have to file any more Canadian tax returns.
The US policy is different. Moving away from the homeland doesn’t mean you are free from the Internal Revenue Service (IRS). You are required to file your US tax returns every year, report your worldwide income to the IRS and pay any tax imposed by the US tax laws.
Since Canadian residents report worldwide income to the Canada Revenue Agency, US citizens living in Canada have heavy compliance requirements in order to keep up with filings in both countries on income from every source.
US citizens must file personal income tax returns on Form 1040 each year. All worldwide employment income, interest, dividends and gains are reported. US tax rules, which often differ from Canadian rules, apply to determine whether US tax is payable in a given year.
Thankfully, there are a number of mechanisms available that prevent double taxation on most of these types of income. As discussed below, most US citizens living in Canada can stay compliant merely by filing correctly. Generally there is no excess tax payable in the US.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is available to exclude up to $99,200 (in 2014) of employment or business income earned outside the US. As long as you are actually living and working most of the time in Canada, the IRS will not tax even a very good wage. However, unearned income, such as interest, dividends and capital gains, cannot be excluded under the FEIE.
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