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Thinking About Making A #MoveToCanada?

03/11/2016 02:06 EST | Updated 03/12/2017 05:12 EDT
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A quick primer on our tax system and what Americans should know before making the leap

From a northern perspective, Super Tuesday in the U.S. can be a spectacular political event. A candidate unexpectedly rises to the front or, in this case, continues their unexpected rise to the Presidential candidacy. And, like clockwork, a contingent of American voters suddenly proclaim that they're going to move to Canada.

This year's edition of Super Tuesday, though, was something like we've never seen before. "Move to Canada" trended on Google, surging at an unheard of 2,450 percent, indicating that, if Donald Trump wins, people may be more serious about crossing the border than we thought.

So what should people who are thinking of making the trek know about our tax system?

Deadlines matter here, too

There are approximately 1 million American citizens living in Canada. So, anyone moving here should feel good knowing that they won't be alone.

But what they should know about tax deadlines is that ours is typically on April 30. So, they'll have to file their U.S. return by April 15 and a Canadian return by April 30. But don't be deterred by the double deadlines because U.S citizens living abroad have an automatic two month extension to file until June 15.

You don't pay double the taxes

Yes, Canadians pay a lot in taxes. But for good reason -- free healthcare, free schooling, access to robust parks and recreation facilities are just a few things our taxes pay for.

But Americans living in Canada shouldn't be worried that they'll suddenly start paying double the taxes. In fact, the IRS offers U.S. citizens living abroad a foreign tax credit. In essence, if you are earning income abroad and subject to U.S. taxes on that income, you can claim a credit or itemized deduction to avoid getting doubled up on taxes. This helps reduce a person's tax liability to zero to "cancel" the additional taxes created by the foreign income.

In some cases, U.S. taxpayers may find they are owed money because of this credit so it is important to be up-to-date with all requirements. One thing people should know, though, is that the foreign earned income exclusion could exclude foreign income up to $100,800.

Pardon me? The F what?

There are, however, a few forms and regulations that American citizens should pay particular attention to.

First, get to know the Foreign Account Tax Compliance Act (FATCA). FATCA is a law that requires foreign banks to begin sharing financial information with the U.S. government. This may just mean that your bank will ask you to fill out a U.S. tax document (Form W-9) so they can comply with these rules.

Second, do not miss filing the Report on Foreign Bank and Financial Accounts (FBAR) form. This must be filed if you either have interest in, or signing authority over, foreign financial accounts exceeding $10,000 combined. The deadline for this is June 30 with no extensions. For next tax season, this deadline will move to April 15, but an extension can be requested.

Third, U.S. citizens also need to complete a Statement of Specified Foreign Financial Assets (Form 8938) with their tax return if they have specified foreign assets like bank accounts, RRSPs, pensions/annuities or mutual funds that that exceed US$200,000 at the end of the year or US$300,000 at any time during the year. If they participate in Passive Foreign Investment Companies (PFIC), like a Canadian mutual fund, US citizens may also be required to file Form 8621 disclosing this.

But what about tax rates?

Canada has also gone through some political change (I hope you tuned into Justin Trudeau's interview on 60 minutes last weekend). With that change, came a variety of tax law proposals.

Among the ones most likely to have an impact on your return would be the changes to marginal tax brackets. Just remember that, in Canada, people only pay the tax rate on the dollars in that bracket, not the sum total of their income.

The new government is looking at a tax cut for middle class families that lowers the tax rate for people earning between $44,701 and $89,401 from 22 per cent to 20.5 per cent.

In real numbers, if you earn $45,000, you pay 15 per cent on $44,701 and 22 per cent on $299 ($45,000 - $44,701). In this scenario you would be paying a total of $6,770.93 ($6,705.15 + $65.78).

At a new rate of 20.5 per cent, you would still pay 15 per cent on $44,701, but now pay 20.5 per cent on $299 for a total of $6,766.44 ($6,705.15 + $61.29), a difference of only $4.49 under the new system.

Anyone earning over $89,401 can expect to save $670 because they will be able to take advantage of the 1.5 per cent savings on the entire bracket amount (($89,401-$44,701) X 1.5 per cent = $670).

We know that the majority of people who say that they'll move to Canada likely won't follow through. But for the handful that do, they should be in tune with how our tax system works. Like theirs in the U.S., it can be complicated, but sound preparation and planning can make the transition much smoother.

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