U.S. Expats

U.S. Expats

Expat Tax USA: Your US Federal Tax Liability

When moving to Canada, one of the biggest questions many have concerns Expat Tax. Unfortunately, America is one of a handful of countries that vigorously pursues taxes worldwide – so don’t expect to avoid a U.S. tax debt by moving across the border. As a matter of fact, you’re not even allowed to give up your U.S. citizenship to eliminate a tax obligation.

Be aware that America has tax treaties with over 42 countries where the IRS and the foreign tax agencies exchange tax data on their residents. Many Americans think because they’re earning money in another country – and paying that country’s taxes – they have no liability when it comes to their home country and that they are not required to pay expat tax to the IRS. That’s totally not the case.

You still should file a return with the U.S. every year, whether you have income or not. You are not legally required to do so if you don’t owe U.S. taxes, but it’s an important preventative measure as there is a Statute of Limitations on tax disputes. If there is a dispute over back taxes, you start running out the clock on the Statute of Limitations if you file. If you don’t, the IRS can conduct a personal audit at any time in the future and you’ll be liable if they decide against you.

U.S. Tax Residents: How to Navigate PFIC Investment Rules

U.S. taxpayers living in Canada or the U.S. can unknowingly employ investment strategies in their portfolios that have unfavorable U.S. tax implications. Learn which investment securities should be considered and avoided within your investment accounts.

Manage Your Canada-US
Cross-Border Lifestyle

Whether you are transitioning residency between Canada and the U.S. or you have already made the move, it is important to understand the benefits of a cross-border financial plan. Learn how Cardinal Point can help when holding investment assets or financial interests in the U.S. or Canada.

What do US Expat Taxes, PFIC and FATCA have in common?

American expats living in Canada need to be aware of the tax implications from holding such certain securities. US citizens and green card holders who have been advised to acquire foreign mutual funds as a part of their investment strategy should be prepared to deal with harsh US expat tax consequences. We have seen more and more clients with PFIC holdings who are astonished by the increasing complexity of US expatriate tax returns.

What is a PFIC?
Per a general definition, a Passive Foreign Investment Company (PFIC) is a foreign corporation that meets either the “income test” or the “asset test”.
  • Income test. A foreign corporation that generates 75% of its gross income as a passive income (dividends, interest income, rent, capital gain) is considered a PFIC.
  • Asset test. If 50% or more of assets held by a foreign corporation produce a passive income, then this foreign corporation is a PFIC.
 Since most of the foreign mutual funds are PFICs (link is external), American expats are advised to review their holdings and determine whether they might be subject to additional US expat tax (link is external) requirements.

Who is subject to PFIC filing requirements?

Currently a PFIC form must be filed in one of the following scenarios:

  • American expatriates who received direct or indirect distributions.
  • US taxpayers who sold PFIC shares.
  • US persons who make an election on Part II in regards to their PFIC holdings.

However, US citizens and green card holders with PFIC holdings must keep records of their investments whether they are currently required to file a PFIC form or not. American expats should be prepared for an unpleasant surprise while navigating the murky waters of the US tax law.


US citizens and green card holders who keep on ignoring PFIC filing requirements are advised to read more What is FATCA. Canada signed a FATCA agreement with the USA on February 5, 2014. Financial institutions will be required to report the information about financial accounts of US holders. The IRS will match this information to US expatriate tax returns and penalize PFIC owners.

Self-Employment Tax

Another important aspect to be aware of when it comes to Federal taxes is the U.S Self-Employment Tax. If you’re an employee of a foreign company (which could, in fact, be your own foreign corporation) and have payroll taxes from that country taken out of your pay, you don’t have to also pay social security taxes to the U.S. If you are self-employed, however, acting as an independent contractor, then you must file a Schedule C with your U.S. Tax return and pay the appropriate U.S. payroll taxes on your net earnings. The self-employment tax rate is 15.3% and the foreign income exclusion mentioned before does not reduce this liability.

Claiming Exclusions

You need to claim exclusions on your Form 1040 for each calendar year – they are not automatic – and the exclusions only apply to earned income, not rental income, interest or dividends or any income that’s not a result of your work efforts. You will need to fill out and attach IRS Form 2555 to your 1040 to take advantage of these exclusions. The form will also help you to determine what you do and do not qualify for in terms of being eligible for the exclusions. Year-to-year, Form 2555 will also provide what the latest caps on what those exclusions are.

Take the Next Step

US citizens and green card holders are advised to review their investment portfolio and identify any investments that might be considered PFICs. Per the IRS, American expatriates should be prepared to spend 31 hours to prepare a PFIC form. Unfortunately, lack of knowledge doesn’t exempt a taxpayer from liability. Proper guidance from an expat tax preparer is encouraged to avoid potential harsh penalties.

The financial issues faced by American expatriates differ from those of Americans living in the United States in certain very important respects. Investment account management, taxation, estate planning, and currency transfers, as well as global investment diversification are important considerations for US citizens living abroad and only a financial advisor that specializes in such issues will be able to help.

Americans Living in Canada

As an American residing in Canada, it’s important to make sure your financial affairs are structured properly to avoid double taxation issues and ensure compliance with the laws of both countries.

Canadians Living in the U.S.

Whether you are transitioning residency between Canada and U.S. or you have already made the move but continue to hold investment assets or financial interests in both Canada and the United States, proper cross-border financial planning can integrate and coordinate the asset management of your investments, reduce taxes and maximize your estate.

Expatriates Living Abroad

For those Canadians and Americans moving or living abroad, careful cross-border financial planning considerations must be given to ensure tax and regulatory compliance in both your home and adopted countries.