My question involves both the USA and Canada
My father is a dual citizen (US and Canada) who has lived
in the USA for the past 30 years. He owns farmland in Canada and,
on the advice of his US accountant, has been paying US taxes on the
crop gain over the years.
He was recently told that he needs to pay Canadian taxes on the crop gain
Is this correct? Is there any type of foreign tax credit that
would prevent him from being double taxed?
david ingram replies:
I am really amazed that this question should come up after 30 years.
With all due respect to the US accountant, he or she should be stood up
against a brick wall and at least mildly flogged, if not shot for his or
her disrespect for the sovereign nation of Canada and the absolute
likelihood that tax would have been owing to Canada first.
If the farm had been in Illinois, Georgia, South Carolina, California,
or any of another 43 states with a State Income tax, your US accountant
would have been filing a return for that other state and claiming a
state tax credit in the state where your father lived.
This is true, even if you live (as you do) in Washington state which
has no state tax return.
In the case of Canada, the income from the farm has been taxable FIRST in
Canada for each of the 30 years.
My bet is that it is a family farm and that for the first number of
years, parts summers were spent up in Canada actually driving the
tractor or combine, etc.
You kids were likely working as well.
But, as he got older, his desire to work the farm has lessened and today
he is simply receiving a share of the crop as rent with no physical
labour. The last may have been true for all thirty years and he
inherited a farm that he never worked on.
In either case, he has ALWAYS been taxable in Canada FIRST and should
have been paying tax to Canada before he paid anything to the US.
A small difference is that if he was actually working the farm, he would
have been paying a share to the resident province as well. If it was
only a crop share rental, he only pays a federal tax.
In either case, again, the tax paid to Canada becomes a foreign tax
credit and is deducted from any US tax owing on the profit from the farm
by filing US Federal form 1116.
Canada has the right to go back forever. You should very quickly file
the back ten years for Canada and then claim the refund from the US.
Because it involves the US Canada treaty, you can open up the Foreign
tax credits back 10 years.
In other words, this should not increase the tax payable.
It will however increase interest charges and some late filing penalties.
It is possible to avoid the late penalties by filing a voluntary
disclosure. However, unless there is an extremely high tax owing, it
is likely far cheaper to pay the penalties then to pay the legal
expenses necessary to try and avoid the penalties.
In my opinion, voluntary disclosure is only needed when there was a
willful desire to avoid or evade taxes. This is NOT the case here.
Your father sought help and failed to get it and did pay tax, just to
the wrong authority.
We, of course, are ideally set up to deal with the back filings.
CEN-TA Cross Border Services - Tax, Visas, Immigration