Our Tax Prep Bill

Apr 4, 2013 by

Tax return ready for preparationThis is the first year since we moved to Canada from the U.S. that we got both country’s tax returns done before the deadline. When I say “we” I really mean our tax preparer, though of course we’re heavily involved with providing information and answering questions. These are our fourth set of two-country returns since moving and the third tax preparer we’ve tried. This tax preparer seems to be the best so far, but the bill was also the highest : CDN$1,900! Is that shocking? Should I endeavor to do these returns myself? Before you answer, read on…

U.S. Citizens Must File Regardless of Anything

First, understand that if you’re a U.S. citizen (which we both are), you must file a U.S. tax return, period. Until we moved to Vancouver Island, I always did my, and then our, tax returns, no problem. To show you what a nerd I am, I’ll admit I actually enjoyed the return preparation process. Now of course we don’t have to file a state return, but the IRS still insists on hearing from us annually.

Canadian Permanent Residents Must File in Canada

Our status in Canada is Permanent Resident, not citizen. But since we live in Canada full time, we must send a tax return to Revenue Canada (the Canadian equivalent to the IRS) annually as well. The Province where we live—British Columbia—also has an income tax, but what amounts to its tax return is more or less rolled into the federal return.

Our Tax Lives Are Complicated!

I like things simple, so this drives me a bit nuts, which I think is in large part why I elected to chuck the whole mess to a paid tax preparer. To give you an idea:

  • Ms. Money Counselor does project work in “the States” (that’s how Canadians refer to the U.S. usually, or else they  say “south of the border”). I gather that in which country her body is when she’s doing the paid work matters with respect to completing the return of one country or both. She must keep track of the dates she’s in the States and why she was there. And of course she has to file a Schedule C, Profit or Loss From Business.
  • As a freelancer, my wife claims a home office. More tax paperwork. (I could do the same, but two home offices on one return I think would be tantamount to including a “please audit me—I dare you!” taunt with our tax return.)
  • We have what Canadians call a “suite” (better known in the U.S. as a mother-in-law’s apartment) in the lower level of our house. We rent this suite on a temporary basis—one week to two months at a time—to relocators, vacationers, visitors, etc. Just another twist to our tax return, and a couple more forms.
  • Both countries are sure we’re screwing them out of tax revenue by holding income-producing financial assets in the other country and then illegally failing to report the asset’s income to the country where the assets aren’t. (Get it?) So we have to report details of financial assets we hold outside of the country on each country’s return. The U.S. is particularly obnoxious on this point because virtually the same information has to be reported twice—once to the IRS on form 8938, Statement of Specified Foreign Financial Assets, and once directly to the Treasury Department (technically this is not part of our income tax return) on form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (gold star if you’ve heard of this one!). I checked, and the IRS building in D.C. is 0.9 miles from the U.S. Treasury building. Gee, instead of asking every taxpayer with foreign-located assets to file the same information twice, you’d think some big-shot bureaucrats at these two taxpayer-funded agencies could, I don’t know, have lunch or something and figure out how to share. Naaaahhh, that would make sense—for taxpayers.
  • Other forms you may never have heard of that we must file with our U.S. return include: Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b); Form 1116, Foreign Tax Credit; Form 2555, Foreign Earned Income; Form 8582, Passive Activity Loss Limitations; Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans; and Form 8948, Preparer Explanation for Not Filing Electronically (IRS e-file does not accept foreign preparers).
  • There’s no such thing as “married, filing jointly” in Canada. Everyone files an individual return. Even with that, our Canadian returns appear far simpler. They’re many fewer pages at least than our U.S. joint return. But perhaps the Canadian return for Canadians living outside of Canada would be as complex as our current U.S. return, I don’t know.

Just to give you a more specific idea of what I’d be up against if I decide to do these returns myself, below is an excerpt from Ms. Money Counselor’s Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). Our tax preparer provided the explanation:

5. Explain the treaty-based return position taken. Include a brief summary of the facts on which it is based. Also, list the nature and amount (or a reasonable estimate) of gross receipts, each separate gross payment, each separate gross income item, or other item (as applicable) for which the treaty benefit is claimed.

$XX,XXX of Consultant’s fees were earned as an independent contractor. $YY,YYY was earned performing services in the US. The remainder was earned performing services in Canada.  These fees are for independent personal services rendered by the taxpayer. The taxpayer did not have an office or fixed base available to her in the US , and she did not spend more than 183 days in the US. Therefore  pursuant to Article V of the Canada-US Income Tax Convention (1980), the taxpayer does not have a permanent establishment and pursuant to Article VII she is exempt from US taxation on these fees.

Article V and Article VII of the Canada-US Income Tax Convention (1980)?? Oh, man…

Should I Try to Do Our Taxes?

So what do you think? By doing our taxes, I could save us nearly $2,000 a year. That’s a lot. With the last few years’ examples, I think I could tackle the job now, but I’d never be confident I wasn’t missing something, and I’d have to stay up to speed on tax law changes in both countries. I estimate I’d spend 75-100 hours a year on the project, both staying current and actually preparing the returns. Is it worth it?

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