written on behalf of Feigenbaum Law
Many Canadians with American citizenship may not be aware of their tax obligations in the United States. Some of our previous blog posts have identified these obligations and shared information regarding how the Internal Revenue Service (“IRS”) has announced plans to collect tax from Canadians who have not met their United States tax obligations.
In March 2023, President Joe Biden announced a 2024 budget proposal that will increase tax obligations for U.S. citizens living in Canada, if enacted. This blog post will serve as a reminder to Canadians of their tax obligations in the United States and will explain the anticipated impact of the new budget if it becomes legally enforceable.
Citizen-based taxation in the United States of America
Almost every country in the world imposes some tax obligation on their residents. For example, a person born in Canada but does not reside or work in Canada will generally not be responsible for paying Canadian taxes.
However, the United States of America is one of the few countries which taxes people based on citizenship. This means that a person born in the United States of America, but does not currently live or work in the United States, will still be required to file, and potentially contribute to, taxes in the United States.
In 2020, the grace period afforded to Canadians holding U.S. citizenship expired and the Foreign Account Tax Compliance Act subsequently came into force, which required Canadian financial institutions to alert the IRS if accounts owned by U.S. citizens did not have social security numbers associated with them.
High-income taxpayers may have increased tax obligations
Under current law, U.S. citizens with a gross income over $200,000, or a household income over $250,000, are subject to a 3.8% tax on net investment income. However, President Biden’s proposed budget would increase this tax to 5%. For greater certainty, a net investment income includes:
- Interest, dividends, rents, annuities, and royalties, other than such income derived in the ordinary course of a trade or business;
- income derived from a trade or business in which the taxpayer does not materially participate;
- income from a business of trading in financial instruments or commodities; and
- net gain from the disposition of property other than property held in a trade or business in which the taxpayer materially participates.
Under the proposed budget, the increase of 1.2% to the net income investment tax (“NIIT”) would apply to individuals with earnings above $400,000.
Increased NIIT and Medicare taxes may extend life of Hospital Insurance Trust Fund
In its budget proposal, the government pointed out that the Hospital Insurance Trust Fund (“HITF”), which finances healthcare services for people over 65 who have continually contributed to Medicare, is set to be out of funds by 2028. The government wrote that “increasing the NIIT and additional Medicare tax for high income taxpayers and devoting NIIT proceeds to the HITF will extend the life of the trust fund.”
This particular aspect of the budget proposal may significantly impact Canadians with U.S. citizenship. In some instances, taxes paid by an individual in Canada may be used to offset taxes which they would otherwise owe in the United States. However, the NIIT tax cannot be offset, which means that Canadians holding U.S. citizenship who fall under this category may become responsible for paying this tax regardless of how much their Canadian tax contributions were.
What happens if I do not report my investment income?
As mentioned, the grace period for Canadian financial institutions to report accounts held by U.S. citizens expired in 2020. Therefore, the Canadian Revenue Agency has been given the ability to impose fines on Canadian financial institutions that failed to comply with these requirements.
These institutions may now require U.S. citizens who hold a Canadian bank account to provide their social security numbers, or even close accounts of those who fail to do so.
How and when will this tax increase impact me?
Ultimately, while this proposed budget has not yet been passed, the key points raised in this blog post may be enforced if the budget becomes law.
Feigenbaum Consulting will be sure to update its readers if, and when, these changes occur.
Let the Tax Lawyers at Feigenbaum Consulting Help Ensure Your Compliance with American and Canadian Tax Obligations
International taxation involving both Canada and the United States can be incredibly complicated. This intricate system can be made more complex in situations where individuals are unaware of their tax obligations in a particular country or are operating a business on both sides of the border. For these reasons, it is important to work closely with a trained tax professional with experience in both Canadian and American tax law.
At Feigenbaum Consulting, our team led by Mark Feigenbaum, offers a wide variety of cross-border services, including assistance with corporate tax planning and compliance, personal tax planning and compliance, immigration & visa services, cross-border estate planning and services related to tax controversy. To learn more about how we can help you, or to schedule a consultation with a member of our team, contact us online, or call our office toll-free at 1-877-275-4792.