Updated on July 11, 2023

For several years now, the Internal Revenue Service (IRS) has been engaged in a vigorous campaign against international tax fraud and failure to declare bank accounts outside the U.S., including Canada.

IRS streamlined filing compliance allows US citizens living in Canada to update their tax obligations without incurring penalties.

As a U.S. citizen or tax resident (including green card holders) residing in Canada, what are your U.S. tax obligations and what solutions are available to you? To answer your questions, we have called upon the contribution of tax experts from the Raymond Chabot Grant Thornton network.

Q: What are the income tax compliance requirements for U.S. citizens living in Canada?

A: U.S. citizens and resident aliens residing outside the United States are required to annually file a U.S. income tax return and declare worldwide income to the IRS, insofar as this income is equal to or greater than the personal exclusion amount and the applicable basic deduction.

Q: In addition to filing a tax return, are there any other requirements to meet?

A: In addition to filing an income tax return annually, U.S. citizens and resident aliens are required to file form FinCEN 114 (Report of Foreign Bank Accounts) to disclose their interest in certain financial accounts held outside the U.S., if such interest exceeds US $10,000 at any given time during the year.

Furthermore, U.S. citizens and tax residents must also report certain information to the URS on their registered education savings plan, tax-free savings account, foreign trusts, and may need to file form if they hold an interest in a foreign corporation.

Q: What are the applicable penalties if these requirements are not met?

A: U.S. citizens and tax residents who have not or have only partially met their tax obligations become exposed to significant penalties and the risk of legal proceedings. For example, if you omit to file a U.S. income tax return, the IRS can tax you up to 25% of the amount due.

Additionally, if you omit to file the FinCEN 114 report without a valid reason, you may be subject to a civil penalty up to $10,000 per unintentional violation. For intentional violations, penalties may amount to the higher of $100,000 and 50% of the value of the foreign account.

Q: What can I do to adjust my situation?

A: To encourage taxpayers to take action and adjust their tax file, the IRS introduced a voluntary disclosure program in September 2012. This program, named Streamlined Foreign Offshore Procedures for Taxpayers Outside the U.S., applies to U.S. taxpayers residing outside the U.S. who have omitted to file income tax returns or information forms, as well to those who omitted to declare certain income.

The disclosure consists in performing all of the following:

• Filing income tax returns (including all information forms) for the last three years;
• Filing the FinCEN 114 bank account reports for the last six years;
• Paying taxes due plus interest (all penalties are withdrawn under this program).

We can help lighten your burden!

The rules surrounding tax obligations for U.S. citizens and resident aliens are numerous and complex. If you are a U.S. citizen or resident alien and have not met your tax reporting or other obligations with the U.S. tax authorities, consult a Raymond Chabot Grant Thornton specialist who will help you find the best solution for your situation.

Do you have questions relating to U.S. tax issues? The tax experts of Raymond Chabot Grant Thornton can help you!

In 2008, the Ministère des Finances du Québec (MFQ) created the tax credit for the development of e-business (CDAE) program.

The CDAE is to support information technology (IT) providers offering services to improve the productivity of management and manufacturing operations (based on an excerpt from the 2008-4 bulletin *Page 2, paragraph 5, FRENCH ONLY ).

Consistently vague and restrictive definition

Since the program was introduced, several amendments have been made to better adapt it to the reality of IT businesses which, in the eyes of the MFQ, met this goal. In 2015, the MFQ added new, more restrictive rules for IT businesses developing software integrated into equipment in connection with their solution delivered to clients. These new rules are raising questions in the industry and several cases are being very actively discussed with various Investissement Québec (IQ) representatives with regard to the interpretation of software concepts such as “ results of such activities are incorporated into a product intended for sale” (based on the 2015 budget document).

The definition is becoming more specific and the trend leads us to believe that these changes will most likely result in excluding IT businesses from the program that mainly target the manufacturing market – a sector that requires an array of IT solutions to automate procedures.

Two markets, two realities

The rules of the CDAE program are based on a detailed analysis of a corporation’s revenues. In fact, businesses must prove that the different activities included in revenue relate mainly to IT services (system design, software edit, etc.). The MFQ relaxed the rules on several occasions, at the start of the program, to take into account the reality of businesses and their service delivery to clients.

Businesses proposing a computer application to improve operations management are often equipped with different computer equipment and related services, which the MFQ has taken into account when reforming the program. Currently, for a business targeting the services sector (insurance, financial institutions and others), the rules are quite appropriate. But what about those relating to manufacturing businesses where procedures need to be automated? This is the issue. Let’s take a closer look.

It goes without saying that the same IT service delivery provided to a manufacturing business that wants to improve its productivity requires more than just computer equipment. An IT solution is implemented in a hostile environment that requires industrial facilities, better adapted electric systems for improved insulation, etc.

Furthermore, special accessories are also required for reading data in the manufacturing process, which is not the case for implementing IT in a service organization since data to feed an information system is added by users (i.e., a keyboard) and not by data acquisition! Before the introduction of the new rules for software integrated into equipment, this type of automation was already penalized. Diversifying products and services to provide the solution is often no longer considered in the program as an IT activity and excludes the service provider from the program.

With the implementation of the new rules in 2015, a restriction applies to embedded software which undermines the expansion of certain businesses. It should not be forgotten that software incorporated into equipment is becoming increasingly more necessary in the automation of processes and is now specifically excluded from revenues to determine whether a business is eligible for the program. As such, if the MFQ wanted to improve productivity in management and manufacturing operations, as stipulated in the 2008 bulletin when the CDAE was created, it is not doing so but rather, with this course of action, it is cutting out the manufacturing aspect that was part of the program’s initial objective.

The solution

At a time when the Quebec government is currently focussing on innovative manufacturers, it would be very wise, in our opinion, to make the CDAE as accessible as possible to IT providers targetting manufacturers specifically, such that Quebec businesses can benefit more from innovative, high-performance products in keeping with their ambitions.

To do this, we believe that the approach should be reviewed so it is more global and based on the CDAE’s fundamental objective, instead of simply removing the rule for integrated software, which hinders innovation. Does the IT solution contribute to improving a manufacturing business’s productivity? Yes, it fully contributes and we believe that this is what should be guiding the eligibility analysis for Quebec IT providers.

Companies established in many countries cannot escape transfer pricing.

Transfer prices are the prices at which related entities located in different countries trade, including the sale of goods, services or intellectual property.

In Canada and most countries, these prices must be established by respecting the arm’s length principle, which stipulates that the conditions for related entities’ transactions must be the same as those that would have been agreed upon by non-related entities.

While companies established abroad must comply with transfer pricing rules, they can also use them to optimize their tax situation. Therefore, it is in their best interest to know these rules as soon as they plan on expanding abroad.

A planning tool

The proper use of transfer pricing can help a group minimize its tax burden. In fact, economic theory states that the greater the work performed, risks assumed and assets held, the higher the expected returns. Therefore, it would be to a group’s benefit if value-added functions, valuable assets and high risk activities were within a jurisdiction with a lower tax rate since a greater portion of the group’s profits will be taxed at a favourable rate.

Documenting transfer pricing

The Canada Revenue Agency (CRA) is one of the most aggressive tax bodies in the world when it comes to auditing transfer pricing. When it deems that the arm’s length principle is not being observed, the CRA can adjust the transfer pricing and impose a penalty. This penalty will apply if the adjustment increase exceeds the lesser of $5,000,000 and 10% of gross income.

However, the penalty will not apply if the taxpayer can prove that, through transfer pricing documentation, serious efforts were made to comply with the arm’s length principle. This documentation is therefore essential for companies established abroad as it must provide a complete description of transactions between the group’s entities and demonstrate the method used to determine the transfer pricing.

Your Raymond Chabot Grant Thornton consultant can help you better understand these issues.