Common Mistakes People Make On Their Cross-Border Taxes
Whether you’re a US citizen, making business transactions in Canada, or a Canadian resident working and earning in the US, you need to be aware of cross-border tax implications before filing your taxes in the US and Canada. By hiring a Chartered Professional Accountant who specializes in cross-border taxes, you can avoid errors, manage foreign assets, ease the stress of tax filing, and minimize your taxes.
Most taxpayers are unaware of the stark differences in compliance rules of the Internal Revenue Service (IRS) in the US and Canada Revenue Agency (CRA) in Canada, and instead of proactively preparing to file their tax returns they delay the engagement of a CPA in their tax management. Without expert guidance, they’re caught off guard and end up making avoidable mistakes like incorrect and delayed filing, leading to tax penalties and other more severe repercussions.
To help you avoid some of the fundamental errors that are made, Schell & Associates has compiled a list of the most common mistakes people make on their cross-border taxes and how to avoid them.
1. Not declaring worldwide income.
One of the most common mistakes that taxpayers make is not realizing that both Canada and the US tax you on your worldwide income. Unless you are a Canadian who has declared non-residence for tax purposes when leaving the country, you have to file a tax return in both the countries.
2. Filing returns with different information.
The information filed in one tax return is required to finish the other one. In other words, you must enter the same information, including all your income and expenses in both returns.
3. Making mistakes in the FBAR filing.
If the combination of deposits and investments in your foreign bank accounts is totaling greater than ten thousand dollars, then it needs to be reported in your FBAR filing. If not reported, you can be subject to tax penalties.
4. Being unaware of foreign tax credits.
While you have to file taxes in both countries, it does not mean that you are subject to double taxation. Tax payable or paid in one country can be used as a foreign tax credit to another country. For Canadians working in the US, the CRA will allow a credit for the taxes that you pay to the US and its individual states. This also holds for Americans working in Canada and the tax they will pay in Canada.
5. Not declaring non-residency.
While the US taxes its citizens based on citizenship, Canada taxes them based on residency. If a Canadian citizen declares non-residency, they do not need to file and pay Canadian taxes. Most Canadians are unaware of this and end up spending money on taxes, that they could have saved.
6. Failing to report income on a TFSA.
TFSA or tax-free savings account is an account available in Canada that does not apply taxes on any contributions, interest earned, dividends, or capital gains, and can be withdrawn tax-free. However, as a US taxpayer, you have to report your interest income or gain within your TFSA accounts. You can take the help of your financial advisor to help you calculate the amount of interest for this purpose.
To avoid these and other mistakes, reach out to the experts at Schell & Associates.
We are a team of Chartered Professional Accountants in Victoria, BC, with close to three decades of experience in accounting, bookkeeping, and tax. We are registered with the IRS to do US tax returns and specialize in cross-border taxes. We offer our services to individuals and small businesses across Victoria, Duncan, Sidney, Nanaimo, Vancouver Island, BC.