International Taxation

<p> The maximum civil penalty for non-willful failure to comply with FBAR reporting requirements is $10,000.<a href="#_ftn1">¹</a> However, additional penalties may apply for willful violations. Penalties for a willful failure to file can be as much as the greater of $100,000 or 50 percent of the amount in the account at the time of the violation.<a href="#_ftn2">²</a> These penalties can be imposed for failure to file or for failure to maintain the required records (see Q ). </p><p> The statute of limitations for civil or criminal violations is generally six years for FBAR purposes, meaning that the total penalties for failure to file for multiple years could be more than the value in the account. </p><p>These dollar values are adjusted annually for inflation. In 2025, the penalty for a non-willful failure to comply is $16,536 and $165,353 or 50 percent of the amount in the account at the time of violation for a willful failure to comply.<a href="#_ftn3">³</a></p><p>The Tax Court has ruled that FBAR penalties are not taxes imposed under the Internal Revenue Code, so taxpayers are not entitled to the notice and other requirements of IRC Section 6330. The taxpayers in the case had submitted a request to the Treasury Department's Debt Management Servicing Center (DMSC) to request a Collection Due Process (CDP) hearing.<a href="#_ftn4">⁴</a></p><p><hr></hr></p><p><strong>Planning Point:</strong> On multiple occasions, disputes have arisen over whether the $10,000 maximum penalty for non-willful FBAR filing failures is to be imposed on a per-account basis or a per-taxpayer basis. </p><p><hr></hr></p><p> Both the Ninth Circuit and a Texas district court previously held that the total non-willful FBAR penalties that can be imposed on an individual should be limited to $10,000 per FBAR report, rather than $10,000 per financial account.<a href="#_ftn4">⁵</a> However, the IRS continued to attempt to assess penalties on a $10,000 per-account basis. That position was accepted in the Fifth Circuit. The U.S. Supreme Court has now clarified that non-willful FBAR penalties should be imposed on a per-report basis, rather than a per-account basis.<a href="#_ftn5">⁶</a></p><p> The test for willfulness is generally whether there was a voluntary, intentional violation of a known legal duty. The IRS has the burden of establishing willfulness. Willfulness is shown by the person's knowledge of the reporting requirements and the person's conscious choice not to comply with the requirements. In the FBAR situation, individuals should know is that they have a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR. </p><p><hr align="left" size="1" width="33%"></hr></p><p><a href="#_ftnref1">1</a> 31 U.S.C. 5321(a)(5)(B)(i). </p><p><a href="#_ftnref2">2</a> 31 U.S.C. 5321(a)(5)(C). </p><p><a href="#_ftnref3">3</a> <em><em>See</em></em> <a href="https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar">https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar</a>. </p><p><a href="#_ftnref4">4</a> Jenner v. Commissioner of Internal Revenue, 163 T.C. No. 7 (2024).</p><p><a href="#_ftnref4">5</a> See <em>U.S. v. Boyd</em>, 991 F.3d 1077 (9th Cir. 2021) and <em>U.S. v. Bittner</em>, 469 F. Supp. 3d 709 (E. D. Tex. 2020). </p><p><a href="#_ftnref5">6</a> <em>U.S. v. Bittner,</em> No. 21–1195 (Feb. 28, 2023)<em>.</em></p>

<div class="Section1">Canadian resident taxpayers will be subject to tax on half of the realized capital gains arising from the disposition of Canadian real property (assuming the property is held on capital account as opposed to on income account). That is, only half of the realized capital gains will be subject to tax at the individual's marginal rate.<a href="#_ftn1" name="_ftnref1">¹</a> If a loss is realized, then such losses are deductible, but only as against other capital gains.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     CRA: Calculating your capital gain or loss, <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/gns/clclt/menu-eng.html">http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/gns/clclt/menu-eng.html</a>.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Canada does not have estate taxes. However, the provinces in Canada levy probate taxes. Canadian probate taxes are narrower in application than U.S. estate tax.<a href="#_ftn1" name="_ftnref1">¹</a> For example, Ontario probate taxes will apply on assets that are the subject of a will probated in Ontario, but will not apply to real property situated outside Ontario.<br /> <br /> U.S. Individuals residing in Canada will need to consider both U.S. and Canadian tax in their estate planning.<br /> <br /> Special care needs to be taken in developing succession plans for U.S. citizens resident in Canada due to the potential for mismatch in tax treatment of individuals in Canada versus the U.S. As these individuals are potentially subject to both the ITA and Internal Revenue Code, care must be taken to ensure that any estate plan is advantageous under both. There are many traps that can catch taxpayers dealing with both systems. Seeking professional advice from cross-border proficient advisors is well advised if you are a U.S. citizen who lives in Canada or who has assets situated in Canada.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     See https://www.attorneygeneral.jus.gov.on.ca/english/estates/calculate.php for how to calculate Ontario rates.<br /> <br /> </div>

<div class="Section1"><br /> <br /> There are several types of tax-assisted private pension or retirement plans, and they function differently depending on the participants involved and the structure of the plan. There are registered pension plans ("RPPs")<a href="#_ftn1" name="_ftnref1">¹</a> and deferred profit sharing plans ("DPSPs"),<a href="#_ftn2" name="_ftnref2">²</a> which are employer-sponsored pension plans that benefit employees working in Canada, and involve contributions made by both the employer and the employee. These differ from registered retirement savings plans ("RRSP")<a href="#_ftn3" name="_ftnref3">³</a> and registered retirement income funds ("RRIFs")<a href="#_ftn4" name="_ftnref4">⁴</a> in that these are individual plans and only the individual or the spouse of the individual can contribute to his or her own plan. An RPP, DPSP and an RRSP matures in the year the individual turns 71, which means that the total value of an individual's RRSP is included into income in that year, unless the individual "rolls" his or her RPP, DPSP or RRSP into a RRIF (essentially on a tax-free basis), or in the case of an RRSP alone, into an RRSP annuity (also on a tax-free basis).<a href="#_ftn5" name="_ftnref5">⁵</a> In this manner, RRIFs are simply extensions of RRSPs that can also be self-administered, with certain restrictions that are imposed on the individual such as annual mandatory withdrawals.<br /> <br /> The tax benefit available with RPPs, DPSPs, RRSPs and RRIFs is in the form of a tax-deferral, which is a benefit to the individual because of the time value of money. The individual contributions to the plan(s) are deductible against income in the year the contributions are made, and are not taxable to the individual until the contributions are withdrawn (with two notable exceptions being withdrawals to participate in either the Home Buyer's Plan<a href="#_ftn6" name="_ftnref6">⁶</a> and/or the Lifelong Learning Plan<a href="#_ftn7" name="_ftnref7">⁷</a>). The tax on the contributions is thereby "deferred" to the year of withdrawals. There are limits on the amount of contributions an individual can make in a given year, which limits are defined by an individual's "earned income," participation in other plans, employer-dictated contribution limits and statutory maximum contributions. In addition, there may be other tax benefits, such as:<br /> <p style="padding-left: 40px;">(1)     Any growth on the contributions within the plan are tax-exempt and are not taxed until withdrawn;</p><br /> <p style="padding-left: 40px;">(2)     Typically, at the time the individual begins to withdraw from an RRSP or a RRIF, the individual is retired and is therefore in a lower tax bracket. The amount of tax owed on the contributions would likely be less than the amount of tax that would have been owed by the individual in the year the contribution was made;</p><br /> <p style="padding-left: 40px;">(3)     Pensioners are entitled to split pension income with their spouses, which again may reduce the amount of tax owed in the year of withdrawal;<a href="#_ftn8" name="_ftnref8">⁸</a> and</p><br /> <p style="padding-left: 40px;">(4)     There is a pension credit available on the first $2,000 of pension income, which means that the first $2,000 of pension income is essentially received tax-free.</p><br /> For a U.S. citizen subject to taxation under the U.S. tax code, RRSPs do not qualify for the tax deferral granted by the ITA. However, Article XVIII(7) of the Canada- U.S. Tax Treaty provides some relief. U.S. citizens with RRSPs must file IRS form 8891 to obtain the deferral. This form must be filled out for each RRSP account.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    Subparagraph 56(1)(a)(i) of the ITA.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.    Paragraph 56(1)(i) of the ITA.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.    Paragraph 56(1)(h) of the ITA. Also see http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html CRA: Registered Retirement Savings Plan.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.    Paragraph 56(1)(t) of the ITA.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.    Subsection 146(16) of the ITA.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.    Section 146.01 of the ITA. The Home Buyer's Plan assists first time home buyers by permitting a maximum withdrawal of $20,000 that is put toward the payment of a first home, and the withdrawal is not included into income in the year of the withdrawal, but rather is included in stipulated annual installments that are included into the individual's income over 15 years.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.    Section 146.02(1) of the ITA. The Lifelong Learning Plan operates much like the Home Buyer's Plan. The maximum withdrawal of $10,000 is put towards the individual's education, and stipulated annual installments are included into the individual's income over 10 years, starting no later than 5 years after the withdrawal.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.    Subsection 60.03(1) of the ITA. This section provides that up to 50 percent of pension income can be split with a spouse or common-law partner for tax purposes. The term "common-law partner" includes both common law spouses and same-sex partners pursuant to the definition in section 248(1) of the ITA.<br /> <br /> </div>

U.S. citizens living in Canada have many considerations that should be taken into account, only some of which are discussed here. In addition to the filing requirements already outlined above, U.S. citizens should be aware of the Net Investment Income Tax, or "Medicare Tax" as it has become colloquially known. U.S. citizens who historically have not had any U.S. income tax liability may be subject to this new tax at a rate of 3.8 percent if they have 'net investment income' (generally investment income such as interest, dividends, capital gains, etc. less permitted expenses related to that income such as brokerage fees and interest expenses) and they have a modified adjusted gross income over $200,000 if single, or $250,000 and filing jointly, Unfortunately for U.S. citizens subject to this tax, it seems unlikely that foreign tax credits can be used to reduce or eliminate this tax liability as the net investment income tax is not imposed by Chapter 1 of the U.S. Code and foreign tax credits are only applied as against Chapter 1 taxes.

<div class="Section1"><br /> <br /> Real property is generally considered taxable Canadian property.<a href="#_ftn1" name="_ftnref1">¹</a> The disposition of taxable Canadian property may lead to a tax liability under the ITA where a capital gain results from the disposition. A non-resident may be liable to pay tax on the capital gain notwithstanding the application of the Canada- U.S. Tax Treaty. In the first instance, there is a requirement under the Canada- U.S. Tax Treaty for the purchaser (who is purchasing property from a non-resident) to withhold taxes from the sale proceeds and deliver only the balance of the sale proceeds to the vendor. However, under Article XIII(3) of the Canada- U.S. Tax Treaty, a capital gain on the disposition of real property will likely be exempt from Canadian tax but subject to U.S. taxation if:<br /> <ol><br /> <li>The Canada- U.S. Tax Treaty applies to the parties of the transaction;</li><br /> <li>At the time of the disposition, the property is subject to the Canada- U.S. Tax Treaty, and the property disposed of qualifies as treaty-protected (generally this is property that is not a resource property); and</li><br /> <li>The purchaser files with the CRA the appropriate notice. The non-resident will need to complete CRA Form T2062: Request by a non-resident of Canada for a certificate of compliance related to the disposition of taxable Canadian property.<a href="#_ftn2" name="_ftnref2">²</a></li><br /> </ol><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Assumes the property is residential or recreation real estate, and does not have any mineral or resource exploitation rights associated with it.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2062/t2062-18e.pdf.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Generally speaking, no, as the non- U.S. citizen spouse is typically not directly affected by the spouse's U.S. tax obligations. However, greater care must be taken with succession planning, particularly with respect to U.S. estate taxes. U.S. citizens residing in Canada may want to consider arranging their affairs with the Canadian spouse, as having ownership of Canadian based assets can produce some complications for U.S. citizens and certain Canadian assets.<br /> <br /> In addition to succession planning, there may be additional considerations arising from the citizenship of any children. Generally, children born to one U.S. -citizen parent will be considered U.S. citizens and will be required to meet the same filing obligations as their U.S. parent(s) (with certain exceptions for parents who have never resided in the U.S., or who only resided in the U.S. as a young minor, in which case there may be exceptions that are beyond the scope of this publication; it is recommended to seek U.S. citizenship counsel from an immigration lawyer on this matter).<br /> <br /> Finally, a U.S. citizen should be cautious about making contributions to a "Registered Education Savings Plan ("RESP") for children. RESPs are not tax-deferred investment vehicles like RPPs or RRSPs. Rather, they enable an individual to save for the post-secondary education of a "beneficiary," which usually is the child but can also be the grandchild of the individual. The tax benefit of RESPs does not come from the ability to deduct contributions from income, which means that contributions are paid with after-tax dollars. However, the contributions to an RESP offer 3 important advantages:<br /> <p style="padding-left: 40px;">(1)     The Canadian government will provide a grant equal to 20 percent of the contributions made, up to a $500 annual limit and a $7,200 lifetime limit (these limits may increase from time to time, depending on amendments made by the Canadian federal government);</p><br /> <p style="padding-left: 40px;">(2)     The growth in the RESP is non-taxable until withdrawn; and</p><br /> <p style="padding-left: 40px;">(3)     When withdrawals are made, they are taxed in the hands of the beneficiary, and not the contributor. Typically, the beneficiary is in a lower tax bracket than the contributor, thereby adding to the tax benefit that is received between them.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> The tax treatment of RESPs may be different if the contributor is a U.S. citizen or a Canadian one. The basis for the distinction lies in the fact that the contributions made to an RESP are not tax-deferred for U.S. purposes and may be considered by the IRS as a foreign grantor trust. The contributions are not subject to similar special relief as contributions made to RRSPs. As a result, a U.S. citizen that is subject to U.S. tax and contributes to an RESP for the benefit of a beneficiary may be faced with an unexpected tax liability as any of the income, interest, or capital gains, as well as any of the Canadian government grants, will be considered income of the contributor. Ultimately, it may be best to have the non- U.S. parent contribute to an RESP, or to avoid RESPs all together and use an alternate planning tool.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    Section 146.1 of the ITA contains the complete rules for RESPs.<br /> <br /> </div>

<div class="Section1">Leaving aside any significant non-tax considerations, rescinding one's U.S. citizenship may not necessarily be the answer to ongoing U.S. tax requirements and potential liabilities. There is an expatriation tax under the U.S. IRC that will apply to citizens who have renounced their citizenship.<a href="#_ftn1" name="_ftnref1">¹</a> The consequences and tax liabilities that result from rescinding U.S. citizenship may prove to be onerous, and professional tax and/or legal advice is strongly recommended in this circumstance. The benefits that are provided for under the Canada- U.S. Tax Treaty are designed to ameliorate the ongoing tax consequences that are borne by U.S. citizens living or working in Canada.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRS "Expatriation Tax," http://www.irs.gov/Individuals/International-Taxpayers/Expatriation-Tax.<br /> <br /> </div>

<div class="Section1">If an individual is not considered a resident of Canada by fact, or is not deemed to be a resident of Canada by statute, then the individual will be considered a non-resident. Non-residents are not taxed on their worldwide income, but rather only on income that is derived from a source in Canada. This would include, for example, business or employment income in Canada or monies generated from a disposition of taxable Canadian property. A non-resident is also subject to Part XIII<br /> withholding tax on income earned from property held in Canada, otherwise known as "passive" income. Examples of passive income include the payment of dividends, royalties or interest.</div><br /> <div></div><br /> <div class="Section1">U.S. citizens who are non-residents of Canada but have Canadian source income must file a T1-NR Individual Tax Return with the CRA.<a href="#_ftn1" name="_ftnref1">¹</a> U.S. residents who are non-residents of Canada and earn only passive income need not file a Canadian tax return. Instead, a withholding tax is withheld by the payor and remitted directly to the CRA on behalf of the non-resident. This requirement imposed on payers of monies going to non-residents simplifies the CRA tax collection efforts as against non-residents.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   <a href="https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html">https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html</a> (2022 Income Tax and Benefit Package (for non-residents and deemed residents of Canada)).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The U.S. bases taxation on both residency and citizenship. U.S. citizens are taxed on their worldwide income (income from all sources derived from inside and outside of the U.S.), whether they are resident in the U.S. or not; that is, they do not need to be physically in the U.S. for this liability to arise. U.S. citizens must file Form 1040, U.S. Individual Tax Return with the IRS annually.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> U.S. citizens that reside in Canada are also taxed in Canada on their worldwide income. Canadian resident taxpayers – including any U.S. citizens resident in Canada – must file a T1 Individual return with the CRA annually.<a href="#_ftn2" name="_ftnref2">²</a> The deadline for filing a T1 income tax return is April 30th of the following year, unless the individual earns business, professional or self-employment income, in which case the individual has until June 15th to file his or her T1 tax return. It is important to note that payment of any tax owing to the Canadian government is due on or before April 30th of the year following the tax year, regardless of when the individual's tax return is due.<br /> <br /> Part-year residents, which include U.S. citizens who become Canadian residents for tax purposes during the year, will have part-year tax returns to file in both Canada and the U.S. In Canada, the part-year tax return has the same filing deadlines as the general T1 income tax return applicable to Canadian residents.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   <a href="http://www.irs.gov/uac/Form-1040,-U.S.-Individual-Income-Tax-Return">http://www.irs.gov/uac/Form-1040,-U.S.-Individual-Income-Tax-Return</a>.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   <a href="http://www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html">http://www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html</a> (General income tax and benefit package).<br /> <br /> </div>